PSA Assignment (Completed)

8/10/2019 PSA Assignment (Completed)

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1.0 History of Public Sector Accounting in Malaysia

Unlike developed countries, British colonised developing countries experienced,practiced and enforced British law and accounting practices into their own legislation andstatutes even after their independence. (Othman & Nath, 2010) This is also not an exceptionfor Malaysia. Even after gaining independence, the influence of British can be seen in themanagement of public sector, management of public fund, public employee behaviour andmore. Having said that, there was progress through the years in modernisation of theadministration system especially in economy and financial areas that is following the need ofthe country as well as coming out of the influence of British.

In the 1980s and 1990s, there was a worldwide trend toward a type of governmentalmanagement called New Public Management (NPM) model that recognise the need forbetter accountability, effectiveness, efficiency and transparency. This resulted in publicsector changes. Organisations transitioned away from decentralisation and privatisation tothe development of goal-driven and client-orientated strategies (Nichol & Taylor, 2001). As alogical consequence of globalisation in the beginning of the reform era in 1999, theMalaysian government introduced NPM programs, such as performance measurementreporting, to respond to public demands for productivity, transparency and accountability.This response to public demand followed trends initiated in developed countries across theworld, where performance measurement has become the core of management reform toenhance accountability (de Lancer Julnes & Holzer, 2001)

In an attempt to make Malaysias public sec tor more competitive, Dr. MahathirMohamad, the fourth prime minister who held the post from year 1981 to 2003, came outwith policies such as wearing of name tags by public employee, punch card system, code ofethics in the public sector, Look to the East concept, work procedure manuals and deskfiles, receptionist quality, led by example, telecommunication quality improvements and

more (Mail, 2013). These efforts were continued by the next Prime Minister, Datuk Seri Abdullah Ahmad Badawi to help reduce corruption by increasing transparency. Yet, tilltoday, with Dato Seri Najib Razak as Malaysias Prime Minister, Malaysia is still one of themoderately corrupted countries with Corruption index of 49 in 2012. (TransparencyInternational, 2013)

Actually, there were tools introduced by the government in managing public fundsbetter. These tools are like Modified Budget System, Macro Accounting System, Standard

Accounting for Government Agency, Computerised Accounting System. (Mail, 2013)Procedures and regulations are created, continuously monitored and improved to aid theusage of them. In the other hand, E-filing is introduced to help tax-payer to pay tax onlinewhich helps in efficiency of tax collection system. Other than that, efforts were seen in thecreation of Multimedia Super Corridor which was established in 1996 aiming to be a globalhub for ICT and multimedia innovation, operation, and services to transform Malaysia into aknowledge-economy and achieve the developed nation status in the year 2020. (NITCMalaysia, 2009) This can attract more Foreign Direct Investment (FDI) in our countries andtherefore help our countries in technology advancement.

Although with seen efforts from the government to govern the public sector, thereare internal and external pressures that force the innovation of government in creating valuefor the public. (Hood, 2008). With the sweep of online social media, the citizens of Malaysiaare more aware of what they want and their rights as citizens. Events such as Bersih Rally,Black 505 Rally, the circulation of Sharifah Zohra Jabeen, listen, listen, listen, and more

only means the demand of a transparent, efficient, effective and accountable government ishigher. The citizens are more educated, recognises the inefficiencies that occur in


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(Louis, 2011). In future, the accounting standards issued are expected to be in line with theIPSAS standards.

Recently, Malaysia in its 2014 Budget, also has introduced Outcome-Based Budgeting(OBB) as a tool to achieve accrual basis accounting (The Malay Mail Online, 2013). Thismeans Malaysias budgeting system is moving to an outward facing, results -based budgetingprocess which requires public sector spending to be aligned behind an approved set ofgovernmental priorities (KPMG, 2011).This will improve the efficiency of implementation,reduce redundancy, and evaluate performance of all government projects and programmes.The Minister of Health, the Ministry of International Trade and Industry and Ministry ofFinance will go through evaluation based on the OBB (The Malay Mail Online, 2013).

2.0 The Nature of Accounting in Public Sector

The public sector plays a role in a few level of government such as a federal, state as wellas local or society to provide basic administration services. Not any of the individuals orcompanies has the power to control the public sector because it is part of life in the aspect

of economy and organization that deals with liberation of good and services by and for thegovernment. Similarly, in Malaysia, the government recognized the needs for public sectorentities to improve their efficiency and effectiveness in the terms of services as well as toprovide better accountability and transparency.

Presently, different accounting basis is used by diverse components of the Malaysiangovernment. For instance, modified cash basis has been used by both federal and stategovernment. In the other hand, local government and Islamic Council of Malaysia are usingmodified accrual accounting. In fact, only statutory bodies are using accrual accountingmethod for the time being. All of these accounting systems are intended to provide moreinformation to users while in the meantime try to avoid the complexity of accrual accountingsystem. The modified cash basis, however, is a fusion method that combines features ofboth the cash accounting and accrual accounting system.

Traditionally, cash accounting has been used across the public sector organization.Basically, the basis of either cash or accrual accounting is a set of rules that determine whenrevenues and expenditure or expenses are to be recognized. The cash accounting recognizetransaction and events only when cash has been receive or paid (IFAC 1991). Therecognition of the particular transaction take place independently from the time when goodsand services are ordered, delivered and consumed. In fact, goods and services for whichpayment are made such as labour, stores transportation are considered to be consumedwhen suppliers are paid. In other words, the cash accounting shown only the volume ofdisbursement in which such payment do not disclose the amount of resources used and the

value of actual work done.

According to the cash accounting, the statement of receipt and expenditure isprepared to disclose information about cash flow during a period and cash balance at theend of the date period (IFAC 1993). As a result, the financial statement include only threefundamental items which are cash receipt, cash disbursement and cash balances. The cashreceipt and cash disbursement represent cash inflows and cash outflows respectively, whilethe cash balances is the different between cash inflows and cash outflows. Inherent to thecash accounting, it is not possible to prepare the balance sheet because there are neitherassets nor liabilities in the book. In the other hand, there are no debtors and creditors assales are only recognized when there are cash received and purchases are only recognizedwhen there are cash paid. In addition, there is no closing stock in cash accounting due tothe facts that cash paid to purchases has not been made any adjustment as it does notconcerned with recording usage. Indeed, the cash accounting measured only the financial


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result for a period in terms of difference between cash received and cash disbursed as wellas providing comparison for actual and budgeted expenditure. Therefore, the cash balanceat the reporting date and the users to which those money were applied are used to providethe sourced of cash received during particular period.

On the other hand, under a modified cash basis, recognition is also associated withcash flow. Transactions are recognized only when the associated cash flow occurs, with anexception which the cash flows occurring in the specified period after year end that relatedto events that occurred in the reporting period are also recognized. For example, the grantwould be recognized if is paid either during the year or within a specified time period afterthe year-end. As the recognition is still associated with the related cash flow, judgmentsregarding measurement are usually unnecessary. Elsewhere, under the modified accrualbasis accounting, transactions are recognized when they occurred rather than when cashbeing paid. Therefore, on this basis, contribution may be recognized when the eligibilitycriteria have been met even though payment may occur in a later period. In conjunction,expenditures are recognized in a sense that they are recognized in the period the underlyingevent occurred. In the modified accrual basis, underlying event is the acquisition of goodsand services or the point when transfer becomes due. Besides, there is no allocation of costsof non-financial assets to the periods in which they are used. Cost are recognized for non-financial assets when they are acquired, even though they will be used to provide goods orservices in the future.

Although accrual accounting has been adopted by the public sector in many jurisdictions, objections continue to arise regarding its implementation in that setting. Accrual accounting has been adopted in the government of several countries including Australia, New Zealand and United Kingdom. Likewise, the Malaysian government has alsotaken various accounting initiatives including accrual accounting in an attempt to improve itsfinancial management procedures. Meanwhile, the International Federation of Accounting

(IFAC) has indicated a project to develop a set of core international public sectoraccounting standard (IPSAS), based on accrual accounting and related to International

Accounting Standard (IFAS). From here, it can be seen that the move towards accrualaccounting in the public sector as one of a general acceptance as well as a matter ofcommonality of thought.

Basically, in full accrual accounting system, it recognise expenses when the potentialand future economic benefits of a service is consumed or diminished. For example, the costsof assets that represent future economic benefits of the services are deferred on acquisitionand only allocated to the periods in which they are used. Similarly, the fixed assets would bedepreciated over their estimated useful life. As for the grants, the recognition criteria wouldbe the same under the modified accrual basis in which the grants would only be recognizedwhen the eligibility criteria have been met and the amounts can be estimated reliably.Furthermore, under full accrual accounting, it is more likely that estimates of amounts arenecessary; issues relating to both the probability of the consumption or loss of potentialservices or future economic benefits, and the ability to measure that consumption or lossbecome relevant. In other words, it must be probable that the consumption or loss of futureeconomic benefits has occurred in order for an expense to qualify for recognition.

Other than that, accrual accounting highlights the impact of financing decisions onnet asset or equity and may lead public sector entities to be more farsighted when makingfinancing decision as compare to when relying on cash or cash modified cash reports.Information on net asset or equity also indicates that public sector entities would be held

accountable for the financial impact of their decisions on either current and future net assetor equity. Apart from that, changes in an entitys net asset or equity between two reporting


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dates will reflect the increase or decrease in its capital during the particular period underparticular measurement principles adopted and disclosed in the financial statements.

Additionally, the financial statement will include a statement of financial position whichdisclosed information about assets and liabilities.

Besides that, accrual accounting also provides information on revenues and expenseswhich includes the impact of transaction in which cash has not yet been received or paid. It,however, is important to note that accurate information on revenues is fundamental forassessing the impact of taxation and other revenues on the governments fiscal position. Itis because information on revenues would help both users and public sector entities toassess whether current revenues are sufficient to cover the costs of current programs andservices. Public sector entities, in particular, needs information about expenses in order toassess their revenue requirements, the sustainability of existing programs and expected costfor proposed activities and services. As the accrual accounting provides public sector entitieswith information on the full cost of their activities, they can thus consider the cost ofparticular policy objectives and services. Besides, the accrual accounting provides betterinformation than cash accounting on the actual cost for particular services delivered byentities; whether current resources are sufficient to sustain the level of service delivered toallows public sector assess the most efficient way of producing goods and services as well asmanaging the resources over which they have delegated authority.

As for the Malaysia, the Malaysian government try to fully implement the accrualaccounting system within three years time which in the end would affect the accountingstandards and processes for public sector. One of the main reasons Malaysia should makeaccrual accounting a success is because of all accounting system need to be computerized.In order to improve the Computerized Accounting System (CAS) in Malaysian AccountantGeneral Department, the adoption of accrual accounting is significant in assisting thegovernment to further understand the behaviour towards the use of existing CAS. The CAS,

nevertheless, will be integrated with accrual accounting system that will further applied inpublic sector.

Besides that, recent developments in the Malaysian governmental accountingbringing about improvements for government in terms of budgeting and financialmanagement shown a clear willingness of the government to adopt features of new publicfinancial management. Improving accounting practices and financial management of thegovernment was seen as one of the agendas in an attempt to strengthen accountability ofthe public sector, which can only be achieved by focusing on enhancing the effectiveness inthe management of the governments accounting system thr ough the implementation ofintegrated financial management accounting system; improving the process of budgetingand control; strengthening the implementation of the micro accounting and a standardcomputerized accounting system in statutory bodies.

Lastly, the federal government of Malaysia is set to adopt full accrual-basedaccounting for financial reporting by 1 January 2015, so as to meet the requirements set byInternational Public Sector Accounting Standards (IPSAS). This changes from cashaccounting to accrual accounting will not only allow the public sector to report its financialperformance, financial position and cash flow more accurately, but also lead to a moreaccountable and transparent financial management. The shift is vital for Malaysia not onlyfor a better fiscal discipline and governance, but also will assist government efforts to movetowards a high-income and developed-economy status. Since accrual accounting is regardedas more transparent and puts demands for good governance, it undeniably would be an

important tool for restoring fiscal discipline and systemic credibility.


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3.0 The Advantages and Disadvantages of Cash Accounting and Accrual Accounting

3.1 Cash Accounting

3.1.1 The Advantages of Cash Accounting

First and foremost, the primary advantage of cash accounting is it is quick and easy. It willmake account preparation simpler as businesses will not have to make year-end accountingadjustment whereby usual adjustment for debtors, creditors or stock will be ignored. The

cash basis records only cash transactions, making the cash account as a basic measure ofhow well the organization is performing. When payment received from sale of goods ordeposit made, the revenue is recorded as of the date of the receipt of funds. Moreover,principles underlying the cash basis are easier to be understand and explain.

Secondly, the technical-rational role and the socio-political role of cash accountingexhibit a significant positive relation (Cohen, Kaimenakis, & Venieris, 2013). This mean thatthe use of accounting data for decision making purpose is related to the tendency of theelected management to use the data in order to influence the attitudes of a givenmunicipalitys both external and internal stakeholder s.

Third, the cash accounting was initially considered more appropriate for public sectordue to the facts that its emphasis on compliance with rules and regulations. In other word, itnot only makes little or no reference to the liabilities that an organization will be required tomeet in the future, but also does not recognise the benefits or revenue that will be obtainedfrom purchased assets over a period of time. That is why most countries still using cashaccounting to produce periodical balance sheet information.

Last but not least, the cash accounting need no specialized accounting training. Forinformation, cash accounting involved the separation of funds received, authorizationaccording to set hierarchical responsibilities, and accuracy in the recording and reporting ofmovements in and out of these funds. These tasks, however, do not required specializedaccounting training but simply an understanding of basic record keeping. The system was

fairly unsophisticated and tend to focus more on internal reporting requirements.3.1.2 The Disadvantages of Cash Accounting

One of the disadvantages of cash accounting is it has been poor in term of matchingprinciple. While the cash accounting is good in tracking cash flow, it is totally different whenit comes to match the revenues earned with money laid out for expenses. Matchingprinciple, however, is defined as expenses recognition is realized either because the expenserelates directly to the earning of revenue or because the expenses relates directly to theearning of revenue is incurred. The application of matching principle result in deferral ofprepaid expenses in order to match with revenue earned in the future. This is important inorder to provide proper information on the financial performance and position of an

organization entity. Therefore, a simple cash account will not give a true picture of an


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organization performance. For example, banks might require accounts to be prepared underGenerally Accepted Accounting Principles (GAAP) in order to offer credit and loans.

Secondly, no attempt has been made to match expense with the revenue itgenerates. This means that the income statement and balance sheet may not be a goodindicators in reflecting recent activity and present activity conditions. Cash-based accountingcan distort the true operations of the activity and incorrectly reflect income whereas theaccrual based accounting, transactions are counted when the order is made, the item isdelivered or the services occur, regardless of when the money is actually received or paid.Income is counted when the sale occurred and expenses are counted when there arereceived of goods or service (Tudor & Mutiu, 2006).

3.2 Accrual Accounting

3.2.1 The Advantages of Accrual Accounting

First of all, accrual provide a better picture of financial performance. In fact, accrual

accounting easily allows the business to evaluate or predicted whether the company isprofitable as well as knowing the transaction of profit and expenses where it is coming fromand going. It is in line with the matching principle approach in which revenues are matchedwith expenses incurred to produce the revenues. In contrary, under the cash accounting,the account payables or receivables are not accounted for until the money actually went inor out of the company which might produce an inaccurate financial picture of a company.Other than that, accrual accounting require more bookkeeping than cash accounting methodwhere unearned or liability account must be created to account for advance paymentsreceive from customers until the revenue is earned. According to Sutcliffe (2001), accrualbasis of accounting provide better quality of financial information which is necessary for thedischarge of accountability and better decision making especially in internal management.

Secondly, accrual accounting lead to more accountability and more efficient control.Many have argued that accrual based financial accounting seem to have more informationneeded for decision making than cash based accounting. It have a greater focus on outputsrather than just on the inputs. The information available from accrual based accountfacilitates a better quality of management and decision making including in the case of theallocation of resources. Reporting on an accrual basis accounting not only shows how agovernment has financed its activities and met its cash requirements, but also facilitateusers to evaluate governments on -going ability to finance its activities and to meet itsliabilities and commitments.

Third, accrual accounting provide better performance compatibility managerial and

financial efficiency. Accrual based accounting provides greater comparability of managementperformance results which are not affected by the timing of cash payments and receiptswhich includes information about fixed and current for both assets and liabilities. Basically,the cost of capital assets are spread over the useful life of the assets. In conjunction, themanagement of capital assets is encouraged as the accounts include asset values and itprovide a more effective and reliable assessment of the financial health of the organisationas well as the sustainability of government policy. This show that accrual basis accountingprovides a government with the opportunity to demonstrate successful management of itsresources. Indeed, it is useful in evaluating a governments performance in terms of itsservice costs, efficiency and accomplishments.

Last but not least, accrual accounting is significant in reporting and budgeting. Accrual accounting objective which is more towards to provide understandable, relevant,reliable and comparable information is useful to a wide range of user in making economic


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decisions. Financial reports have to rely on the budget and show differences between theactual results and the budgeted figures as well as any changes during the term whichleading to better cash management and assisting in preparation of more accurate cashbudgets.

3.2.2 The Disadvantages of Accrual Accounting

Basically, the primary disadvantage of accrual accounting is the need of improvedcomputerized accounting and experienced staffs. To apply accrual accounting and issueaccrual accounting financial statements, a need for skilled, experienced accountants andfamiliar with the business will become more intense. The need for achieving effectiveness,efficiency and economy goals while improving accountability and transparency in publicfinancials are expected to upgrade the role of accrual accounting in municipalities whichmean that the accrual accounting is expected to be more aggressive pertaining to the rolesof accounting rather than in cash accounting. Besides, the preparation of discharges forgovernment grant purpose will become more complex and require a more highly developedaccounting skill set. Likewise, the organization such as public sector need for an improvedcomputerized accounting system.

Secondly, there would be increase administrative burden under the accrualaccounting system. In order to provide efficiency financial statement, it is important toestablish a proper accounting systems which includes the purchase of computer systemsand pilot testing of these systems. This will caused the system to be more complicated innature. Without experienced or skilled staffs and effective accounting computer systems, itwill lead to the possibility of government accounting being brought into disrespect if accrualaccounting failed. There is also possibility in which the international accounting standardscould be applied with no real understanding of the issues involved due to the facts that theyare principles-based standards.

Third, the disadvantage of accrual accounting is the difficulties in developingaccounting policies. When shifting towards accrual accounting, there will be gaps in thestandards if the standards not being continually updated and relevant. Moreover, theexternal auditor might be unable to prevent politically-based amendments for particularaccounts if the decision on accounting treatment regarding the particular account has beenmade on political grounds. As a result, the process of financial management andexpenditure control become even difficult for members of Parliament and members ofParliament, the government, staff of the ministry of finance, other ministries and theexternal auditors.

Finally, the disadvantage is the exposure to risks associated with the budgeting

process. Budget often seen as a key document in the public sector. It comprised of theallocation of resources between public and private sectors in order to determine the fiscalpolicy, distribution of the taxation burden and may also provide the legal authority forexpenditure. While the budget remain framed on a cash basis and the account maintainedon an accrual basis, this could make the process of financial management and expenditurecontrol much more difficult if there are no systematic adjustments have been made.

4.0 The Reasons behind the Transformation from Cash Accounting System to Accrual Accounting System in Public Sector

In line of public development, there are many countries have go on with their owntransformation in the public accounting system which is from cash to accrual accountingsystem. Likewise, Malaysia is also in the process of full adopt the accrual accounting system


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in its public sector. However, there should be reasons behind those transformation that wascarried out throughout the world. Hence, those reasons would be discussed further below.

First and foremost, the main reason of transforming the accounting system intoaccrual system is none other than to provide superior accountability as well as transparencyof financial statements and therefore improve decision making. According to GeoffreyThinker, accrual accounting can provide more relevant, reliable, comparable and usefulinformation of financial statement for user or to government. With the accrual accountingsystem, the accountability and transparency of government financial would be more reliablethrough proper information prepared in the financial statements.

Secondly, it is to give true reflection and the real time position of governmentfinancial affairs. This is due to the facts that there are deficiencies of cash accountingsystem during the incurred and reporting of both revenue and expenses. In cash accountingsystem, the transaction of revenue will recognized and recorded only when the cash wasreceived instead of during the particular transaction has been incurred. Unlike accrualaccounting system, the transaction seem to be properly recognized as the revenue will berecorded when it was earned and expense will be recorded when it was incurred. This isvital for government in producing useful information for financial purposes and decisionmaking especially in terms of budgeting.

Elsewhere, a lot of governments that have changed to accrual accounting havementioned to make the true cost of government more transparent as one of their keyreasons. By referring to MIA magazine on August 2011, this reason has been put as one ofthe key objectives of why government need to change the accounting system to a new one.This, however, can be seen in the cost of pension that government provided to employees.The right or correctly to contribute and calculate the cost of pension during the cashaccounting is rather a confusing matter itself and thus caused the existence of unrelated

expenditure. For example, in loan or borrowing coat, it can lead to an outstanding debtsince the government will pay interest by lump sum at the end in cash accounting. Bytransforming by using the accrual accounting system, government can instead make a truecost of financial without eliminate it and it can determined the full cost of governmentactivities as what have been stated by Abdul Khan and Stephen Mayes.

Fourth, government or public sector choose to transform the accounting system isbecause of accrual accounting tend to be more reliable than the present systemimplemented. They are to be believed that accrual accounting is more reliable in measuringfinancial performance and mitigate the challenges of sovereign accountability and riskmanagement. According to Datuk Wan Selamah, the Accountant General in speaking ofNational Public Sector Accountants Conferences 2011 (NAPSAC), stated that migration toaccrual accounting will be seen as an important step for Malaysian public sector financepractice to be in line with those implemented in developed countries. This is because, byadopting and using accrual accounting system, the economic events will be recognized whenit occurred rather than only when payments was received that was practiced in cashaccounting system.

Fifth, the reason of transforming accounting system in public sector is accrualaccounting will present a more systematic approach in public financial performance. In otherwords, government would use systematic approach in identifying, keeping track of, andvaluing of asset and liabilities. According to Dato Sri Michael (2011), the present accountingsystem cannot properly track the certain assets after purchased and in the meantime is not

generally added to the cost of production of goods and services provided to public. This willaffect to government financial performance in produce reliable yet useful information for


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users whereas government are not fully able to get the real picture on how much cost ofgoods and services have been incurred.

Last but not least, Abdul Khan and Stephen Mayes (2009), said that thetransformation of accounting system in public sector is due to the facts that accrualaccounting system will help in promoting changed behaviour for decision maker in budgetingas well as to reform the target in future. They believed that accrual accounting systemcreated an objective to provide an under stable, relevant and reliable yet useful informationfor decision making which in the end lead to a more better and effective economy.Nonetheless, it is important to note that financial budget is one of the important elementsfor a successful transformation in which the results from budget shown many variancesbetween actual and expected figures. Hence, it is significant for the public sector to be ableto make a relevant budgeting (Bunea-Bontas & Petre, 2009).

5.0 The Challenges in Transforming Cash Accounting to Accrual Accounting inPublic Sector

Like any other reform, the implementation of accrual accounting in the public sector is notan exception and will have various challenges on its own. Challenges are inevitablewhenever change is needed, however, Malaysia can learn from best practices and lessonsfrom frontrunners who have adopted International Public Sector Accounting Standard(IPSAS) such as Australia and New Zealand. Accrual accounting, though, is more complex innature and required greater use of judgement than cash accounting and hence its adoptionrequired new systems and considerable timing for a successful implementation. Forexample, New Zealand took ten years to change into accrual accounting.

Generally, public entities face four major obstacles in adopting accrual accountingwhen they try to adopt accrual accounting for the first time (Gomes, 2013). First andforemost, the challenge is related to strategic management issues. These includesestablishing project teams early, focusing on education and communications, preparingbusiness impacts analysis and establishing the right legal and regulatory framework. Globalaid agency such as United Nations Development Programme (UNDP) have to be adopt byIPSAS to facilitate their mission. Basically, IPSAS primary purpose is intended to improvepublic sector accountability and reporting. Though the collaboration, UNDP will set up afinancial shared services centre in Malaysia. This is to ensure the transparency and accuracyof information. There is also a need for comparability for the accounts of others agencieswithin the organizations own different divisions. Meaning to say, management shouldanalyse all the costs-benefits of the economic and social. Apart from that, performance isunlikely to be optimized if there is no corresponding change to the way in whichmanagement and administrative practices are applied. Therefore, it is important to achievebehavioural change on the part of public sector managers to find better ways to achieveoutcomes.

The second challenge towards transformation to accrual accounting is policy settings.Changing the way in which revenue, expenses, assets and liabilities are recorded andreported will not simply by itself bring about the desired improvements in publicadministration. Instead, Malaysia need to comply with international standards for publicsector financial reporting which includes the reporting of all assets and liabilities.

Additionally, they also need to evaluate countries compliance with fiscal transpare ncystandard. For instance, Malaysia can use auditing and assurance as a means for assessingcompliance with standards. In conjunction, a much broader set of goals and incentives are

required to achieve these ideals. Changing the way in which public services are managedand administered will be necessary to bring about improvements. As we know, to change


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the policy setting in a country is not an easy task and required substantial amount ofconsideration and time. The adjustments will not only affect the financial statement itselflike the recognition of assets and liabilities, but also required the exercise of professional

judgement with the transition as the scope for interpretation and judgement regarding therecognition, measurement, presentation and disclosure is more extensive in accrual

accounting. This would, in the end, pose a heavier burden on Public Sector Accountants.Third, the challenge is regarding to the resources requirement issues. It refer to the

staff competencies and technologies used in Malaysia for the purpose of accrual accountingimplementation. During accrual accounting implementation, staff competencies will have tobe reviewed and upgraded in public sector agencies. To make sure the improvement of staffcompetencies, retraining will be necessary to guide them in exploring as well as tounderstand the accrual accounting system. For example, the implementation of e-learningwithin the public sector agencies should be done to ensure a better communication andlearning. Alongside with the accrual implementation, the demand for specialized skills willsubstantially increase. It would incurred a substantial amount of cost due to thetechnologies provided for the staff training program. In fact, people need more training tounderstand accrual accounting as compared to cash accounting. Yet, once theunderstanding towards accrual accounting has been established, accrual accounting isundeniably more informative than cash accounting.

Next, the challenge is about communication. Communication plans and protocolshave to be developed within agencies with staff and contracted consultants, betweenagencies and central agencies such as the Accountant Generals Department withgovernment and parliament, the media and the community. Without a good and effectivecommunication among them, the plan of transforming cash accounting to accrual accountingcan be seen as no more than merely a talk. In terms of staff and contracted consultants,they required good communication to facilitate the effectiveness of the training programme.

In the other hand, a good communication should be established between government andcommunity. In other words, the government should consider the public response towardsthe transformation to accrual accounting. Moreover, the government should be transparentin term of benefits and consequences for the transformation.

On the hand, political issues is another challenge to be considered. It isunquestionably that politic play dominant roles in most of the countries and thus will play itspart in most countries who adopting accrual-based accounting. Malaysia is also notexception for this. As we know, government hold the governing power in most of thecountries and hence has the authority to make a decision on the transition. To make asuccessful transformation, politics is an essential element that cannot be overlooked anddiscounted. While having a set of high quality of accrual accounting standards in place iscrucial to ensure usefulness and transparency of information, sometimes it can be an issuewhen conflicting with political desire.

Furthermore, the completeness of asset and liability registered in all entities also oneof the key challenge in Malaysia. It is because accrual accounting is more difficult andcomplex than cash accounting. The issue arise when accrual accounting requiredaccountants to consider the value of assets regardless of building, equipment or exhibits in amuseum. While the private sector might be easier to evaluate the value of an asset, it is notthe same in public sector as the different nature exist between public goods and privategoods. It is no longer sufficient to know only the costs of items, but instead accountantsneed to assess how the value is used based on its future economic benefit or service

potential.


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Besides that, other issue associated with the transition to accrual is related to cashinformation in an accrual framework. Moving to an accrual basis of accounting does notmean to eliminate completely the cash accounting. In contrast, cash management is anintegral element of an accrual-based financial management framework. In fact, IPSAS andGovernment Finance Statistics Manual (GPSM 2001) both require the production of a full

statement of cash flows that separately identify cash receipts and payments associated withoperating, investing and financing activities. It is to be believed that modern accrual-basedsystems have functionalities to support cash-based accounting and reporting. The task ofconfiguring modern system to provide macro-cash accounting and reporting data is prettysimple. Yet, if the government wishes to retain the capacity to track and evaluate entities,programs, functions, products and cost elements on a detailed cash-transaction basis, it isstill possible but required more complex attendant system configuration and ongoingmaintenance tasks.

Aside from that, there are still some gaps in the international public sectoraccounting standards governing the accrual-based recognition and measurement of financialtransactions, events, and balances. Some of the significant existing gaps includes non-exchange revenue such as taxes and transfers recognition, accounting for social policies ofgovernment, heritage assets, and Private-Public Partnership (PPP). At the moment,governments would need to formulate their own interim standards or guidelines in thoseareas while waiting the relevant international standards to be finalized.

Other than that, the government also face the dilemma in choosing the right systemand procedure for the accrual accounting implementation. Regardless of whether thegovernment adopts a centralized of decentralized model, it is an important element to beconsidered for the purposes of generating consolidated financial statements for the generalgovernment sector or public sector. This is none other than to enable the elimination of allinter-agency transactions and balances, while the sector are separately identified in the

entities accounts. While eliminations of flows are required to produce good qualit y cash-based consolidated reports, an accrual-based framework also required elimination of stocks.Further, system and procedures have to be designed to ensure that eliminations of flowsand stocks are equal and opposite within an integrated double-entry accounting system.Special systems and procedures might be necessary to efficiently and routinely eliminate alarge volume of inter-entity transaction within and between public sector entities.

Last but not least, some commentators have argued that without a change in abudgeting regime, a modest move to accrual accounting would fail to trigger the necessarychange in culture and incentives. As a result, the benefits would be limited. However,government may decide to adopt accrual accounting as a first step before embarking on themore complex task of introducing accrual budgeting. This may give rise to a temporaryinconsistency between ex ante and ex post information. As there will be timing differencesin the introduction of accrual accounting and budgeting, the need to maintain the capacityto generate suitable cash-based reports in the interim is particularly important. Additionally,government might also decide to introduce accrual-based appropriations to align spendingauthorization with budget and actual. This, nonetheless, is to reflect among other things,the constitutional and legal requirements of individual jurisdictions since government haveadopted different approaches in those areas.

6.0 The Impacts of the Adoption of Accrual Accounting in Public Sector

First of all, the effect of the adoption of accrual accounting can be seen through the

information provided. With accrual accounting, it provides information about financialposition and performance relevant to the management of public resources which are not


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provided in cash accounting. The information about financial position such as the stock ofwealth, performance or change in the stock of wealth is significant for better judgments tobe made about efficiency and effectiveness of economy, value for money, and in the use ofpublic resources (Rowles, 2004).

Secondly, in terms of reporting and budgeting, the objective of accrual reporting isdifferent compared to cash accounting in which its aim to provide understandable, relevant,reliable and comparable information, as well as useful for wide range of users in makingeconomic decisions (Bunea-Bontas & Petre, 2009). In fact, accrual accounting comprise ofnon-cash information such as revaluations, write-offs and consumption of assets throughdepreciation. In addition, there is a need for a new chart of accounts to be designed to meetthe new standard of reporting. As for the budgeting, financial reports have to rely on thebudget in showing the variances between the expected and actual figures during particularterm. The impacts of accrual accounting, however, can be seen through the accrualbudgeting shown below.

Accrual Budgeting

I. First of all, accrual budgeting will provide improved cost information todecision makers and improved discipline for budget execution purposes(Blndal, 2004). With accrual budgeting, decisions will be based upon thetotal cost of producing outcomes and outputs instead of only the immediatecash outlay. Additionally, budget execution must also take note to the costsbeing deferred as well as more constrained from undertaking activity that itscash impact will affect subsequent reporting periods.

II. Secondly, the accruals will direct the focus towards improving capital stockmanagement (Blndal, 2004). This is due to the facts that accruals providesbetter incentives for management and disposal of assets as well as betterincentives in planning investments. In addition, it also provides newmotivation in managing capital such as debtors, creditors and stocks.

III. Thirdly, accrual budgeting can eliminate biases perceived to exist in which therecording of capital investments has been viewed as a lump sum instead ofbeing capitalised and depreciated over its useful life (Blndal, 2004). In fact,capital spending is to be believed that being neglected in the traditional cash-budget framework which often lead to unsatisfactory state of infrastructureand other capital assets. The issue arose when an asset which actually has auseful life, but its total acquisition cost being treated as single item in oneyears budget rather than capitalised and distributed over its useful life.

IV. Fourth, the adoption of accrual budgeting can be a catalyst for othermanagement reforms to be made in public sector (Blndal, 2004). To behonest, the introduction of accrual budgeting cannot be seen as separateitem in the public sector. This can be seen from the countries that haveadopted accrual budgeting whereas accrual budgeting have contributed to awider management reforms in their public sector. Indeed, the accrualbudgeting was a key device in changing people behaviours and to foster

culture change for particular government.

V. Last but not least, accrual budgeting can light up the long-term sustainabilityof public finances (Blndal, 2004). This can be done though the highlights ofthe long-term consequences of current decisions. It is, however, derived


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through the incorporation of a balance sheet in the accrual budgetingframework that consists of government's assets and liabilities.

Third, there will be adoption of current public accounting standards such asInternational Public Sector Accounting Standards (IPSAS). With the transition towardsaccrual accounting, government will have no choice but to adopt the international publicaccounting standards for them to be aligned with the global movement. However, the wayaccounting standards might be applied in particular government can be difference and couldlead to potential risks that might reduce the validity of the financial reports produced. Forinstance, IPSAS might be applied without any real understanding or the general accountingprinciples in IPSAS are not properly addressed (Bunea-Bontas & Petre, 2009).

Fourth, the impact can be seen through the financial performance. The accrualaccounting not only provides information on revenues and expenses, but also the impact oftransactions in which the cash has neither been paid nor received. The knowledge onrevenues is v ital in assessing the impact of taxation on the governments fiscal position andthe need for borrowing in long run. In the other hand, the knowledge on expenses isessential in assessing revenue requirements, the probable cost of proposed activities andservices as well as the sustainability of current programs. Moreover, the income statementprepared in accrual accounting helps government to focus on management by results andmanagement of resources. As a result, performance measurement is more reliable when fullcosts for a period are taken into account.

Fifth, the governance and accountability within the public sector would be enhancedthrough the adoption of accrual accounting (McPhee, 2006). Accrual accounting is to bebelieved that would provide the foundation for the additional flexibility provided to publicsector managers. In the meantime, accrual accounting also enhance the accountability inpublic sector by extending the notion of performance beyond the use and application of

cash. In terms of governance purposes, accrual accounting help to strengthen the objectivesfor a more competitive approach in public sector provision whereas it facilitate more efficientand effective resource management. Furthermore, accrual accounting help to provide alonger term focus on the effect of government and management decision.

7.0 Other Countries Experiences in Accrual Accounting

During the last two decades, the transition from the cash accounting into accrual accountinghas been a trend in the public sector in many countries. The trend, thus, has shown thataccrual accounting not only has found it admirers from the private sector, but also hasstarted to grow substantially as one of the favourite in public sector as well. Therefore, athere, we would like to address some of the countries that have adopted accrual accounting

in their public sector to have an insight view how each of the stated countries experiencesfrom the adoption of so called accrual accounting system. Although the accrual accountinghave lay the basic principles theoretically, there can be seen many differences in terms ofpracticality and implementation. Hence, the countries discussed here would give us a briefunderstanding towards the accrual accounting system in which different countries wouldhave different design of accrual accounting system in their public sector as well as theimplementation process. It is important to note that the inclusion of Australia and NewZealand is due to the facts that they are among the early pace-setters in accrual accountingreforms in public sector, while the Romania and Netherlands are included due to theiruniqueness approaches and experiences of accrual accounting in their public sector.

7.1 Australia


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In general, the adoption of accrual accounting for the public sector in Australia issomehow similar to New Zealand as it occurred during a period of broad economic reforms.The Australias reforms, however, not as aggressive as what can be seen from those of NewZealand. A comprehensive reforms were implemented through two initiatives which are theFinancial Management Improvement Program and the Program Management and Budgeting

due to the pressure arose during early 1990s. Likewise, a government management systemwas introduced with the emphasis on performance assessments through the FinancialManagement and Accountability Act of 1997. Soon afterwards, the government agencies arerequired to use accrual basis in terms of budgeting, reporting, and accounting. In its 1999-2000 budget, the Australia has first produced its comprehensive accrual-based financialstatements along with the fully implemented accrual output budgeting. Australia hascontinued to expand its accrual-based accounting and budgeting ever since. (Champoux,2006)

The Australia, again, look alike to the New Zealand in which it has shown reinforcedfiscal discipline in recent years. With the reinforced fiscal discipline, Australia not onlymanaged to produce a surplus budget in every year for almost a decade, but also succeededto reduce its net debt to near debt elimination. Other than that, its gross financial liabilitieswhich is 15% in year 2005, has been the second lowest among the Organization forEconomic and Co-operation and Development (OECD) countries. Simultaneously, Australiahas enjoyed a steady economic growth in real GDP by averaging 3.6% annually over thepast decade. Still, the question arose again whether the accrual accounting reforms are themajor contributor to both the fiscal discipline and economic growth as well as to what extenthas the accrual accounting reforms benefited the Australian. (Champoux, 2006)

7.2 New Zealand

Essentially, the adoption of accrual accounting in New Zealand has took place during the

economic reforms which is to transform the countrys economy from being one of the mostcentrally controlled in the non-communist world to a very open economy. Those reforms,though, has a span of only a few years. It first began in the mid-1980s with the widespreadof privatization and corporatization of government-owned commercial entities. In addition,there is a broad deregulation of its currency and financial markets. Not long after, thegovernment began to adopt modern management practices in order to increaseperformance and accountability in its remaining public commercial entities. (Champoux,2006)

In term of budgeting, the New Zealands budgeting process has been based upon acash accounting system till year 1989. Yet, New Zealand has redefined the governmentsbudget process by making an output-based budgeting 1 in under the passage of the PublicFinance Act of 1989. Under the Public Finance Act of 1989, all budgeting and reporting atthe department level also required to use accrual methods. Intrinsically, the departmentsmust use accrual-based projections and reports in order for the Parliament to compare costswith private suppliers whenever possible. Moreover, the Public Finance Act also implementedaccrual-based performance assessments. In year 1992, New Zealand managed to come outwith its first fully accrual-based combined financial statements which is also known as theCrown financial statements. By nature, these statements are very much similar to the GAAP-compliance reports of large corporations and it is audited independently. Not longafterwards, the Fiscal Responsibility Act has expanded the accrual system even wider in year

1

An output-based budgeting process , emphasizes the use of output (product) cost information as amanagerial tool and more specifically as the basis for a purchaser/provider (quasi-market) model ofbudgeting. (Guthrie & Carlin, 2000)


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1994 whereas the government is required to articulate its fiscal strategy and report progresstowards its objectives on an accrual basis. Subsequently, accrual accounting has been theprinciple system for both budgeting and financial reporting. In the meantime, it also hascontinued to be utilized as a performance measure for government entities. (Champoux,2006)

In overall, the accrual-based reforms in New Zealand undeniably can be seen as ifnot, the most comprehensive that any country has undertook to date. Nevertheless, it is stillhard to determine the true fiscal and economic impact of the reforms despite thesignificance impact from the reforms towards government management processes. Mostobservers, in general, seem to agree that the accrual measures have brought many benefitssuch as better information for the purpose of asset management, cost calculations and amuch greater fiscal discipline. In fact, New Zealand has shown strong fiscal restraint sincethe implementation of the reforms. Even so, New Zealands gross fi nancial liabilities hasdecreased dramatically from 65% of GDP in 1993 to 23% in 2005 along with the reportedbudget surplus in nearly every year since early 1990s. In the meantime, New Zealand hasenjoyed a moderate to strong economic growth by averaging around 3.3% annual growth inreal GDP and has its net debt drop significantly from approximately 52% of GDP in 1992 tonear 10% in 2005. While all the statistics are showing positive and encouragingperformances from the New Zealand reforms, it is highly uncertain for many to what extentthe economic success can be attributed to the major reforms and, more specifically, the useof accrual accounting.

7.3 Romania

Basically, the development of public sector accounting in Romania was initiated back in year2002. In year 2005, the development has been enlarged through all the public sectorentities, but the transition can be seen as a static process even though there are many

unresolved issues. In fact, the introduction of accrual accounting in the Romanian publicsector has been viewed as a requirement of adhering to European Union (EU) rather than asa necessity or an improvement (Pitulice, 2013).

In term of political spectrum, the accrual accounting as a whole has not disseminateits principles and advantages too much to the Romanian political spectrum as the budgetingis still performed on a cash basis. In addition, the political spectrum was involved in theadoption of accrual accounting only as the supplier of Government members due to the factsthat the Government is typically formed of politicians from the party holding the majority ofvotes in Parliament for a certain period of time. In conjunction, the accrual accounting forpublic sector entities was introduced through Order of Ministries of Finance in year 2002 and2005 respectively instead of by laws that must be approved by the Legislative power whichis the Parliament. Nonetheless, the interest for accrual implementation in public sectorentities was quite low as it is only a step taken by the Romanian Government to harmoniseits regulations with the EU regulations, to finally become a member state of EU (Pitulice,2013).

As for the accounting standards setting for the public sector, the role is an exclusiveprivilege of the Ministry of Public Finance without the involvement of the accountingprofession which represented by The Body of Licensed Accountants and Experts

Accountants in Romania (CECCAR). Indeed, CECCAR was never been involved in either theapplication or monitoring process of accrual accounting implementation in the public sector.

According to Hepworth (2003), it is to be believed that the setting of accounting standards

by the Ministry of Public Finance on its own can be seen as to apply the standardsdeveloped in a way that suited the political circumstances of the moment. As a result, the


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process lacked its credibility as there is absent of critical appraisal from the accountingprofession on the process of adoption of accrual accounting.

In the other hand, the preparation of financial statements is subject to internal auditsand not required to be performed annually. The national Court of Accounts performs anexternal audit to verify the financial statements prepared. Yet, the audits performed by theCourt of Accounts are not necessarily performed on an annual basis, but every two to threeyears. The external audit, however, focus mainly with legality of expenses and respectingthe legal procedures instead of the judgements made for asset valuations, materiality andprudence. Moreover, internal auditors in public sector entities are not mandated to bemembers of the statutory audit professional organism such as the Romanian Chamber ofFinancial Auditors (CAFR) in which most of them are actually are not the members. In theother hand, the external auditors of the Court of Accounts also not required to be membersof either CECCAR or the CAFR. Thus, it lead to people start to wonder how pertinent theopinions expressed by both the internal and external auditors from accrual accountingobjectives perspective.

Apart from that, an independent audit is not seen as compulsory for public sectorinstitutions regardless of their level of hierarchy. Thus, the public sector entities are notsubject to make their financial statements or internal audit reports available publicly. Theabsence of independent auditor has been viewed as missing piece towards the reliability ofthe financial statements prepared. Although, the CAFR is involved in auditing public sectorentities for reports on projects, some of the audit reports have scope only to the projectitself rather than the entity activity as a whole.

Besides that, the training sessions were designed for the accountants rather than themanagers when the Romanian Government implemented accrual accounting. This focus hasled to little understanding from management towards accrual accounting and the possibility

of using information derived from the accrual financial statements that might lead toefficiency and effectiveness of the entitys itself. According to Pitulice (2013), the perception accounting is an accountant job was still exist among the management as they are not yetheld responsible for the results of the entity. In fact, they are not even educated tounderstand what the benefits that can be derived from the accrual accounting in publicsector entities.

In overall, the implementation of accrual accounting in Romania still far from reapingit full benefits as the existence of many unresolved issues such as the size of state, theneeds of lowering the bureaucracy in public management as well as the needs of moreinvolvement from private sector and Non-Government Organization (NGO) in public sector.

Although the existence of many unresolved issues, the government authoritiesacknowledges there are many room for improvements. For that reason, it is to be believedthat the accrual accounting in Romania undeniably will enter the right path and itsobjectives will soon be fulfilled.

7.4 Netherlands

Generally, strengthening accountability in public sector has a long history in the Netherlands(Hoek, 1994). The process of reinforcing accountability in the central government sector haslong set in motion since the mid-1980s. The Dutch government even has developed majorreform plans due to the pressure from the Parliament. One of the notable reform plans is anintegrated commitment-cash accounting system. However, further reforms were developedin the early 1990s which includes accrual accounting. Apparently, the Dutch governmentstarted to value the experiences of the agencies. In fact, the government has announcedthe introduction of accrual accounting system in the entire central government sector in its


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Budget Memorandum 2001. As a start, the central government decided to adopt the 1995European System of Accounts (ESA) as the standards for government accounting.

Although the Dutch government has adopted ESA as the leading standards fornational accounting, it raised many questions as the International Public Sector AccountingStandards (IPSAS) is view by most as the leading standards for government accounting.Indeed, the Dutch governments intention to apply ESA in its budgets and financial reportsseems exceptional from international perspective in which it implies that the contents ofthese documents will fail to meet current requirements. Examples of the noncurrentrequirements includes the heading of items in the reviews, the criteria for capitalization, thenon-allowance of provisions as well as the grouping of main financial reviews. (Hoek, 2005)

In terms of budgeting and accounting in the Dutch central government, they actuallymainly uses a mixed cash or commitments system. In order to gain the status of agency,the central government have to apply an accrual accounting system. Even thoughaccounting on accrual basis did have its own additional merits, the political and economicconditions in Netherlands did not permit a comprehensive move towards new accountingsystem. For instances, the standardization of public spending on the costs basis implies thevariation of cash expenditure. In addition, in the case of investments, the costs might notnecessarily equal to the cash spending. While a cash-based system recognizes investmenton the date of spending, an accrual-based system spreads the costs of investments overtime. In year 1999, the introduction of policy accounting was announced by the Dutchgovernment and the process is referred to VBTB after the documents acronym in Dutch. Soon, the government made an accrual accounting system possible effective from year 2001and only conditionally for other central government organizations. Consequently, there aretwo different accounting systems exist in the public sector in which the central governmentstill applied a cash or commitment system. The existence of two different accountingsystems was confusing and, hence, been criticized widely.

Yet, in 2000, the Dutch government has taken a proactive approach by theannouncement of accrual-based accounting system to be implemented in the whole centralgovernment sector within several years ahead. This is viewed as significant step forward toa more result-oriented government in which the policy budget links means, instruments andperformance. This step, however, did not go as smooth as it would have been expected asthe Dutch finance minister announced a reconsideration of the governments developmentplan regarding the budgeting and accounting system in year 2003 and prefer only partialimplementation of accrual accounting system. In fact, the government has decided toimplement accrual system on a case-by-case basis through the expansion of its agencieswith the expectations of there will be approximately 80-85 percent of central governmentemployees will work for agencies. (Hoek, 2005)

Despite all of the arguments and discussions regarding the implementation of accrualaccounting system in government sector, the accrual-based budgeting and accountingsystems has actually found its feet and widely used in the Netherlands. While it is beingimplemented, it is actually been used for a long time by the local, provincial and single-purpose governments. The government, though, aim to accomplish this process by year2006. Although some positive progress has been made, it seems impossible for the goal tobe achieved in year 2006. Presently, departmental budgets still provide inadequate insightinto policy effects whereas the relationship between means, expenditures and goals as wellas the performance is not clear enough. This, nonetheless, is due to the facts that policyobjectives are not yet formulated in a measurable manner in terms of target figure and

effect indicators. (Hoek, 2005) Hence, it is not possible to see the Dutch to successfully


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implement accrual system into its government sector as the ideas are there and issues havebeen identified.

8.0 The Rationale for Accrual Accounting: A Case of Malaysian Public Sector

In Malaysia, the transition from cash accounting to accrual accounting can be traced back inyear 2011 when the Malaysian government took the challenge to transform its cashaccounting into accrual accounting. The use of accrual accounting has been seen as anattempt by the Malaysian government to improve the financial management procedures inMalaysia. In the other hand, Wynne (2004), seen the transformation towards accrualaccounting is part of the process of adopting the style of financial statements practised byprivate sector companies into the public sector. Following the decision made by theMalaysian government, the Accounting Project Team of Accountant Generals Department(AGD) has been assigned to carry out the transition and implementation of accrualaccounting in Malaysia public sector. The transition, though, expected to be completed infive years time (AGD, 2011). Since then, many initiatives and programs have beenestablished to reach the full implementation of accrual accounting. The rationale behind thetransformation, however, has many other reasons that would be discussed further in thefollowing paragraphs.

First of all, one of the main rationale that driven the transformation into accrualaccounting is none other than to have more effective and efficient fiscal management(Irvine, 2011). With accrual accounting, the financial information generated would be morereliable and better in terms of accountability, decision making and improved transparency.Moreover, the traditional cash accounting method is perceived as no longer relevant in manycountries around the world. Other positive impact of accrual accounting includes theempowerment of controlling officers to be financially responsible, the efficient allocation ofresources by the value for money (VFM) concept and performance audits in relation to the

results framework of the outcome-based budgeting (Irvine, 2011). This, nevertheless, willproduce an effective management and made it possible to assess the effectiveness eachagency.

Secondly, it is due to the facts that accrual accounting is convenient to users. According to Rowles, the convenient to users is one of the rationales for accrual accountingimplementation (2004). With the implementation of accrual accounting, the Malaysiangovernment would be able to improve governance, have better control over its assets,increase the confidence of all stakeholders, and most importantly provide more accurateinformation from decision-making process with all stakeholders (Nadiah et al, 2013). As aresult of a more authentic and accurate information on the government position, the flow ofeconomic resources and economic performance is more efficient and effective. In fact, theaspect of convenience to user also implied on how accrual accounting facilitate the work ofan account.

Thirdly, the aspect of cost and financial statements which relied on an accountantspoint of view and own judgement also have motivate the transformation towards accrualaccounting. McPhee (2006), in his study on the use of accrual accounting within the publicsector, has lists down the benefits of accrual accounting implementation which includes theability to reflect and provide the foundation for accountability for the additional flexibilityprovided to the public sector managers. In addition, by extending the notion of performancebeyond what has been done in cash accounting, the accountability can be enhanced.

Fourth, comparability is the other rationale for accrual accounting to be implementedin Malaysia. From this perspective, a user can compare financial reporting system usingaccrual accounting and other accounting basis. Comparisons such as on financial information


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not only can be made among international organizations, but also between the public andprivate sectors in Malaysia. For information, reporting comparability is referred to as theability of earnings to account similarly for identical transactions and differently for differenttransactions. However, it is important to note that improving comparability is not an easytask for standard setters given the increased level of cross-border transactions over the last

few decades and the historical differences exist in local Generally Accepted AccountingPrinciples (GAAP).

In a nutshell, all of the rationales stated above, nevertheless, seem convincing andrelatively strong from the explanations stated. However, the implementation of accrualaccounting to the management of public sector is not without its own criticism. This can beseen from various research made whereas persistent objections have been made towardsthe relevance of accrual accounting to the organization of public sector economy activity.

One of the main critics towards the accrual accounting to be implemented in thepublic sector is that accrual accounting is not relevant to the economic management of thepublic sector. It is mainly due to the underlying or inherent differences in the character ofboth publi c and private sector. To be exact, it is argued that the nature of the basiceconomic problem differs between public and private sectors. For public sector, economicactivity flows from the operation of public policy. For instance, in a democratic society, theeconomic activity is derived from the political process in which the people collectivelydecides on the employment of collectively contributed scarce inputs obtained throughtaxation in its various forms. In the contrary, decision-making is more concerned with theallocation of resources to meet consumer demand for goods and services. Indeed, theallocation of resources in private sector is determined by relative profitability or opportunitycost.

Secondly, it is to be believed that the need to determine financial position, and a

subsequent need for recognising all assets and liabilities, is not relevant since theinformation that has no bearing on decision-making about the use of resources should notbe included. It is because resources in public sector are acquired and allocated with thepolitical influence rather than the market and thereby determined preferences in theresources allocation process. From this perspective, accrual accounting has seen to belimited with the mechanism of resource allocation in the private sector. Additionally, such aview indicates that the operation of public policy about the use of public resources occurredwithout consideration of its economic implications from the decision made.

Thirdly, the issue arise on the accounting for heritage assets. In fact, the issueregarding the accounting for heritage assets in public sector has been widely debated.However, the debate can be seen significant in two aspects. First of all, the argument lies adebate on the general extendibility of the accrual accounting model to all public sectorentities and all types of assets. While some of the public assets are relatively hard toaccount with the use of accrual accounting, it is not possible for those assets excluded fromthe financial statements. It is because if any of the entities or assets of public sectorexcluded from an accrual accounting regime for whatever reason, the determination offinancial position become qualified and left the financial statement in doubt. Secondly, theinvestment by communities in heritage assets is commonly important and should be subjectto financial accountability. For example, in European countries, the decision-making aboutthese assets has been undertaken without financial information or evaluation of the implicitopportunity cost.

Hence, it is ultimately down to the Malaysian government in weighing all the possiblebenefits and drawbacks in making the decision on whether to implement accrual accounting


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in the public sector which the decision actually has been made in June 2011. However, theMalaysian government needs to always review and overlook the progress of the accrualaccounting implementation for a successful transformation, while in the meantime bear inmind that not all reform or transformation programs would be an instant hit or success.

9.0 Conclusion

In overall, with the globalization and standardization of accounting standards on the cards,many of the countries have been given little choice but to follow the world trend. With theintroduction of New Public Management (NPM), many of the government around the worldhave shifted from the traditional cash accounting into so-called accrual accounting. Thereare different of approaches and methods been used along the implementation process withcountries such as New Zealand and Australia among the most comprehensive in accrualaccounting implementation.

However, it is important for any government who wish to implement accrualaccounting to properly analyse all the potential benefits and drawbacks from the adoption ofaccrual accounting. It is due to the facts that accrual accounting might have many benefitson its own in which the increase efficiency and effectiveness of public management beingthe most notable benefit, the accrual accounting might have its own drawbacks which in theend might outweigh the total benefits. In fact, a thorough study should be conductedalongside with reviewed of other countries experiences in order to facilitate a moresuccessful implementation of accrual accounting.

Last but not least, accrual accounting is a long and demanding process which wouldprovide various obstacles throughout its implementation process. The challenges, however,not only would occurred before and during the implementation process, but also after thesuccessful implementation of accrual accounting which often refer to the future challengesfaced by government after using accrual accounting. Therefore, government should alwaysbe prepared and patient along the transformation process as one of those little mistakes

might ruined every efforts that have been made.


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