Accounting and International Financial Reporting

Article Identify

The title of the article under review is, “Globalization: governmental accounting and international financial reporting standards”. The name of the periodical in which this article has been published is Socio-economic review, published on October 15, 2007, Volume 5, Number 4.

Relationship to course

This article is relevant to the accounting major course, in the sense that is tackles the issue of globalization, from the point of view of the reporting standards for both the government as well as the international finance organizations. The article particularly explores the possibility of adoption of ‘business style accounting practices’ by the various activities of the government. In this case, the article emphasizes on the need to embrace accounting reporting standards when handling international finances.


The article illustrates how both New Zealand and Australia acted as pioneers during the early 1990s in terms of the adoption of ‘business-style accounting practices’ with respect to the various activities of the government. The article further illustrates how New Zealand in particular, though often touted as a late starter with respect to ‘neo-liberal economic reforms’, nevertheless managed to assert its position as a driving force as well as a principle designer in as far as the issue of government accounting is concerned. In this case, the article provides that the treasury in New Zealand discovered that the activities of the management of government finances and accrual accounting, coupled with a reporting of the same, to be fundamental components of the ‘neo-liberal reforms’ that the government was so keen on embracing.

Before the adoption of these reforms, it is important to note that the operations of the government in New Zealand, with respect to its financial management elements, borrowed heavily from a cycle that was more or less cash-based, in terms of the control of its expenditure, and a reporting of the same. The actual adoption of these reforms took place in 1989. Since then, the reformers of the governmental accounting in New Zealand have managed to endorse the implementation of related business-style international changes. This has taken place in a direct manner, through the application of IFRS (International Financial Reporting Standards) that have specially been tailor-made for use by businesses, by IASB (International Accounting Standards Board), or via the application of IPSAS (International Public Sector Accounting Standards) in an indirect manner.

The article calls to attention the fact that even as accounting is deemed to be quite technical in nature, nevertheless the implementation, along with the propagation of ‘business-style accounting’ for all the various activities of the government is quite significant, from a social as well as a constitutional point of view. As a result, the article argues that there is a need to pay more attention to the application of this system. The article appears to defend the need for the government to be managed as a business, by arguing that there is a need to ensure that the financial reports of the government are presented in a related form to the financial records reporting of businesses, because after all, the government too, is also a business.

These sentiments by the authors of this article are in line with those that Bobbitt (2002) has issued, to the effect that globalization, along with the steady substitution of ‘the nation state with the market state’ (Bobbitt, 2002). Further, the article has addressed the issue of policy development, through an exploration of “the garbage can model”. Kingdon (2003) contends that the attainment of policy reforms is more probable at a time when we are in a position to integrate the recognition of a problem with the creation as well as the refining of proposals to such policy reforms, with politics. In light of this, the article argues that during the period of implementing the policy reforms into the various activities of the New Zealand government, the model of the garbage can is believed to have found application.

The article further contends that in the case of the government reforms with regard to the reporting of tips accounting activities, the entrepreneurs that were behind this policy sought to undertake a policy mission. The ‘garbage can model’, the article argues, could find application when developing financial reporting standards for the government. During the mid-1980s, a number of the states in Australia sought to embrace ‘business-style accounting’ with a view to better mange the finances of their governments. Shortly in 1989, the model was also adopted by the government of New Zealand.

According to the article under review, the garbage can theorem, as it relates to the making of policies, provides that the reporting of financial activities business-style emerged as an undertaking that was quite suitable for government activities, owing to the fact that well-connected and influential players within the process of policy-making were out to promote it.

The issue of government accounting, along with the utilization of ‘business-style accounting’ has also been addressed at length by this article. In this case, the article provides that prior to the adoption of this system the government of New Zealand relied on a systems that focuses on annualized cash appropriations. The shortcomings of this systems, the article provides, were turning into more of a problem, one the activities of the government were seen to expand, in effect also turning rather complex.

Moreover, the system failed to reinforce long-term planning program, in addition to its failure to keep inventory of imports and exports. There was a need therefore to come up with a system that not only enhances the constitutional control of a government, but also adequately addressees the issue of specific government concerns. This is how then, the government in New Zealand ended up adopting business-style accounting.

Even as New Zealand sought to adopt an accrual accounting system of the business-style, nevertheless it is the position of this article that such a system is quite inappropriate, from a constitutional point of view, to be adopted by governments. In a bid to further shed light to this point, the article first makes the observations that ‘business-style accrual accounting” is characterized by a control function that is financially centralized, in effect weakening the basic constitutional tenets that identify democratic control.

The article notes that the democracy model that characterizes the parliamentary system in Westminster hinges upon the balancing and separation of power between the three arms of the government: the executive, the legislature, and the judiciary. The control and scrutiny of public finances forms a fundamental aspect of the Westminster parliamentary model, given that the parliament is constitutionally mandated to the collections and expenditure of money from taxpayers and citizens, in a manner that is in line with the approval of the parliament.

Accordingly, this principle borrowed from Westminster has become enshrined in the constitutional acts of 1986, in New Zealand. For that reason, the business model that characterizes the reforms for the financial management of the activities by the government of New Zealand are in effect an undermining of this Principe of the legislature, which is why this article is against the system.

Secondly, the authors of this article opine that the accounting practices of business-style accrual that are usually applied during the production of financial reports meant for a number of companies (that is to say, ‘a consolidated financial report’), if utilized to integrate the reports of the different functions of a government with a view to generating a ‘whole of government financial report’, take precedence over the constitutional severance of authority.

The article in this case calls to mind the possibility of an issue arising in which it becomes quiet difficult to arrive at a decisions regarding what should, or should not, constitute the financial report of a government. The article has indicated how the financial management reforms that were adopted by New Zealand resulted in a fragmentation of the activities of the government, with the result that each of the individual fragments of the government was required to issue their financial reports separately.

Thirdly, this article has indicated how the application of accounting practices business-style, as well as the application of ‘fair value policies’ with the aim of revaluing both liabilities and assets, eases the process of public assets disposal devoid of public or parliamentary knowledge. The article notes that accrual accounting has traditionally failed to make an allowance for accrual adjustments, with the results that the balance sheets of governments have failed to capture the significant decrease or increase of the assets value, over time, a trend that has since been termed as ‘fair value’ accounting.

The article argues that the adoption of ‘business-style accrual accounting practices’ ought not to be implemented by governments as an option that is automatically suitable. The authors contend that the development of these is with a view to fulfilling the requirements of business conditions, and there is a significant difference between them and government.

Author’s Conclusion

The garbage can model, with regard to the issue of policy development, offers a plausible explanation regarding the mergence of an inappropriate solution (in this case, the adoption by a government of ‘business-style accounting’) towards a policy problem (the application of suitable government accounting practices). Consequently, policy entrepreneurs in Australia as well as New Zealand have participated in endeavors to help in the implementation of business-style accounting by the global governments.

Even with the existence of assertions to the effect that the implementation of business-style accounting rooted in IFRS, shall seek to enhance governance, the development of such standards was not meant or the establishment that are characterized with unlimited liability, like governments are, by their action to bear the debts of citizens and taxpayers. Such an unlimited liability is important for governments to have a control constitutionally over its executive arm, and also to control its access to money from the public.

Biondi (2006) argues that the control of cash expenditure is not an element of ‘business-style accounting’. Going by the example provided from New Zealand, financial reporting business-style entails the use of business logic which is not only incoherent with the scope of the financial activities of the government, but also conflicting to public purpose. The initiative of business-style accounting has now been in existence in New Zealand for a number of years, although unpleasant constitutional ramifications are slowly becoming obvious.

The adoption of business-style accounting reporting as well as management has seen the removal and disabling of fundamental conventions and safeguards of the parliamentary system, in effect meaning that the power of parliament to not only examine financial control with regard to the activities of the government, but also to at the same time, exert control over it as well. With the advancement in terms of globalization, the adoption of business-style accounting may be expected to have wide-varying ramifications for various countries, and more so for those nations that have in pace a government that is democratically-elected. Accordingly, Bobbitt (2002) asserts that globalization appears to result in a substitution of nation states on the one hand, with what the author terms as market states, on the other hand.

Even the powers of parliament to control the financial reporting of the government appears to be somewhat regulated, with the result that the very ability of parliament to call for an improvement on financial reporting has been limited. As a result of the parliament in New Zealand to implement IFRS, its power to control the financial reporting of the government has in effect witnessed a transfer to a center of power that is beyond the borders of the country. As a result, sovereignty concerns are further raised. The assertions of IASB are very clear; its fundamental concern is on the issue of financial reporting, for those businesses that participates in the financial market. In this case, this statement appears to trouble the standard-setters from both Australia and New Zealand, who have been on the forefront to campaign for the initiative of governments to adopt business-style practices.

Apparently, the decision to move to IPSAS, an action that is at the moment widely being advocated for, could appear to give the government a better alternative to adopt for its accounting reporting activities, as opposed to the implementation of IFRS. Even as IPSAS appears to be in particular tailor-made for governments, nevertheless there is a need to put in mind the fact that IPSAS revolves around business-style accounting, which have already been trialed in both Australia and New Zealand, the intent here being to integrate these with IFRAS (Simpkins, 2000).

Seeing that only a handful of individual were in support of the development of ‘business-style governmental accounting’ in New Zealand, there is the possibility that the constitutional ramifications as a result of this adoption were not exhaustively addressed. It is important for governments to first ensure that standardizations and accounts reporting practices are first addressed through a public debate, to explore the ramifications of their adoption.

Personal Reaction

The issue of globalization has ensured that businesses the world over aspires to harmonizing their operations through the implementation of financial reporting standards that are recognized globally, with the aim of enhancing their competitiveness. Such includes the GAAP (Generally accepted accounting principles), IASB (international accounting standards board), and the FASB (Financial accounting standards board), amongst others. In the same vein, a number of aspiring entrepreneurs, notably in New Zealand and Australian, sought to embrace this concept during the 1990s and campaigned for its adoption by their respective governments. In essence, what this means is that the governments were being viewed as business, which they are in a sense.

Nevertheless, it is important to appreciate the fact that inasmuch as it would be plausible to initiate business-style accounting practices’ for adopting by the various activities of the governments, nevertheless a significant difference exists between on the one hand, the government and on the other hand, the business (Clarke, Dean & Oliver, 2003). In addition, there is also the need to appreciate the fact that the driving force of governmental accounting, relative to that usually practiced by the business entities, differs is a significant way. In the case of both new Zealand and Australia, the governments of the two countries are based on the Westminster systems of government, which provides that “ the ‘underlying principle’ of government accounting is democratic control over the use of funds, made critical by the coercive ability of governments to raise finance through taxation” (Bobbitt, 2002).

Further, there is a need to appreciate the fact that the control as well as the scrutiny by parliament of the manner in which the government handles finances from the public entails a basic constitutional principle that is a characteristic of the model of Westminster. In broader terms, what this means is that a country’s finance in due course bears a correlation with its liberties (Hooper & Kearins, 2005). Such a liberty so acquired has been utilized by the English parliament for decades as a powerful leverage, when it comes to the issue of the unlimited liabilities of the governments, thanks to debts that are incurred by its citizens, as well as the taxpayers.

On the other hand, a business entity is characterized by a limited liability, further questioning the rationale of the adoption by governments of ‘business style accounting practices’. Going by the case of the adoption of such accounting practices by the governments in New Zealand and Australia, there is a need to ensure that prior to the adoption of the same practices by other governments, in terms of business-style accounting, along with the adoption of financial reporting, akin to those adopted by the business entities, it is important to ensure that these are first standardized via either IPSAS, or even IFRS, for the simple reason that holding on to these principles is at the moment advocated for as an embodiment of sound governance.

Accordingly, it is important to ensure that even before such practices are adopted, the opinions of the public need solicitation first. Even as New Zealand has gained global leadership in as far as the initiation and the eventual adoption of these financial reporting and accounting reforms, nevertheless this is not an indication that other countries ought to embraced these blindly. On the contrary, it is important for other governments the world over to carefully examine and draw lessons from the efforts that were made by the government of New Zealand, as they endeavored to become world leaders in terms of the adoption of these practices, and also in a bid to evade potential developments that could act to weaken democratic principles.

Even as the application of accrual accounting, as had been the case in new Zealand prior to the adoption of ‘business style accounting practices’, the kind of accrual accounting that a government may wish to implement, along with its potential application, ought to strengthen democratic principles, via the assessment, as well as the management of public finance.

Reference List

Biondi Y. (2006). Keeping the Entity Concept in Public Sector Accounting: an Assessment of the New French Government Accounting Standards. (2006) Paris: University of Paris IX Dauphine.

Bobbitt P. (2002). The Shield of Achilles: War, Peace and the Course of History. New York: Knopf Publishing.

Clarke F., Dean, G., & Oliver K. (2003). Corporate Collapse: Accounting, Regulatory and Ethical Failure. Cambridge: Cambridge University Press.

Hooper K., & Kearins, K. (2005). Knowing “the price of everything and the value of nothing”: accounting for heritage assets. Accounting, Auditing and Accountability Journal, 18:410–433.

Kingdon, J. (2003). Agendas, Alternatives, and Public Policies. (2nd Ed). New York: Longman.

Simpkins K. (2000). Dreams can become reality. Chartered Accountants Journal, 9 (39).

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