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Accrual Budgeting-State of Play
Rose Verspaandonk
Politics and Public Administration Group
9 May 2000
Introduction
The Commonwealth delivered its first accrual Budget in May 1999. This
Research Note outlines the nature of accrual budgeting and its role in
broader public sector management reform. It also identifies some issues
revolving around financial management skills and accountability.
What is accrual budgeting?
Under accrual budgeting, an agency is funded for an agreed price for
its outputs, including non-cash items such as depreciation. Thus the amount
an agency is appropriated in any one year may exceed its cash expenditure.
Any unspent amount is accumulated for use in future years (e.g. to replace
buildings and equipment).(1)
The Government points to the following benefits:
- the identification of the full costs of the goods and services agencies
provide, and the resources agencies administer, on behalf of the Commonwealth,
and
- the provision of the full information necessary to manage the financial
position of agencies, including: information on assets and liabilities;
income earned or expenses incurred during the financial year but not
resulting in a cash transaction in that year; cash inflows and outflows;
and consistent and streamlined reporting arrangements.(2)
How does accrual budgeting fit with other public sector management
reforms?
Accrual budgeting was introduced in conjunction with the outcome-output
framework and the devolution of financial management responsibilities
to agencies. These changes are intended to provide agencies with the flexibility
and the responsibility to meet the Government's objectives. Other reforms
have also transformed public sector management (see below for an outline
of the new framework).
The new public sector management framework
- emphasis on meeting performance objectives-for agencies via the outcome-output
framework, and for employees via performance agreements
- accrual budgeting, accrual accounting, costing of outputs and capital
use charges
- devolution of responsibility to agencies
- increased opportunities for outside organisations and individuals
to provide services to, and on behalf of, the Commonwealth
- more flexible employment practices, and
- increased use of information technology and telecommunications (e.g.
online services).
What new demands does accrual budgeting place on Commonwealth non-commercial
agencies?
The costs of implementing accrual budgeting vary from agency to agency.
Along with other elements of the new public sector management framework,
accrual budgeting requires strong financial management skills from public
sector managers.
In the words of the Auditor-General, 'Perhaps the biggest challenge for
public service managers and accountants is to understand and then to use
accrual-based information, including financial reporting data, for better
program management.'(3)
The financial responsibilities of managers have been specified more clearly
to include areas such as:
- measuring and ensuring effectiveness and efficiency, and
- using quantitative and qualitative performance information for planning,
controlling, budgeting and reporting.
How are agencies meeting these demands?
Agencies' responses to these changes have been the subject of comment
by the Australian National Audit Office (ANAO) and the Vertigan Report.(4)
In July 1999, the ANAO reported its findings from a study of seven agencies.
It noted that line management and finance areas were generally not well
prepared for the new financial management framework. General observations
included the following:
- the financial responsibilities of managers were narrowly defined,
leading to the provision of a limited suite of information,
- little evidence was found of managers using available financial information,
including accrual-based data, for daily operations, strategic planning
or performance management,
- finance areas were not generally well prepared for their new role
of assisting managers to analyse and interpret financial information,
and
- more training was required to assist managers to understand how to
use accrual-based information to support the cost-effective achievement
of outcomes.
In his Review of Budget Estimates Production Arrangements, Dr Michael
Vertigan (former Secretary of the Departments of Treasury and Finance
in Victoria and Tasmania) noted that the 1999-2000 budget was 'a very
considerable achievement' that would 'position Australia at the forefront
of public sector budget and financial management internationally.'(5)
However, he also noted a range of outstanding issues that limited the
usefulness of budget-related information. These included the level of
expertise in accrual accounting, the level of resources devoted to the
budgeting function, and the level of support and guidance available to
agencies.(6)
Dr Vertigan noted also that the full benefit of the new framework
would take some time to realise. He emphasised the importance of establishing
the integrity of accrual-based information before using it to make judgements
about performance.(7)
Does accrual budgeting compromise accountability?
The Auditor-General has defined accountability as '... the process whereby
public sector agencies and the individuals within them are responsible
for their decisions and actions and submit themselves to appropriate external
scrutiny.'(8)
A question has been raised as to whether accrual budgeting diminishes
the capacity of external bodies to exercise such scrutiny (e.g. via the
Senate Estimates process).
In a submission to the Joint Committee of Public Accounts and Audit (JCPAA),
Mr Maurie Kennedy (former Senior Executive in the Department of Finance
and Administration) argued that appropriation by high-level outcomes may
have a systemic potential to permit payment for executive actions that
could be hidden from Parliament.(9)
This concern prompted the JCPAA to recommend that the Department of Finance
and Administration review the accrual budget format to ensure that the
change to accrual accounting does not diminish the ability of Parliament
to scrutinise appropriations.
On the other hand, the Government points to strong accountability through
arrangements such as annual reporting requirements and access to information
on the full costs of government services. For example, agencies are required
to report in their annual reports against performance indicators specified
in Portfolio Budget Statements.
At this early stage, it is difficult to determine the degree of transparency
provided by accrual budgeting and accounting. However, it is possible
that, as the JCPAA observed, a clearer view of government activities will
be achieved at the cost of a 'reduced ability to identify and influence
spending on the processes of government.'(10)
Conclusion
By itself, the implementation of accrual budgeting would represent a
substantial challenge for agencies. In conjunction with other public sector
management reforms, this challenge is intensified, highlighting the need
for strong financial management skills.
Accountability is a key component of Australian democracy. The consequences
of accrual budgeting for the quality of accountability are not yet clear.
However, the significance of this issue means that continuing attention
is essential.
- Department of the Parliamentary Library, Budget Features, 1999-2000,
p. i.
- Department of Finance and Administration web site (www.dofa.gov.au)
- Auditor-General, Whole of Government Financial Reporting (or putting
on a happy face) (information paper), 1996.
- M. Vertigan, Review of Budget Estimates Production Arrangements,
http://www.dofa.gov.au/pubs/vertiganreport/ July 1999.
- ibid., p. 2.
- ibid., p. 5.
- ibid., p. 4.
- Auditor-General, 'Whither accountability-the wisdom of Solomon' (speech
delivered 13 September 1999), p. 16.
- M. Kennedy, Submission to the JCPAA inquiry into the Financial
Management and Accountability Act 1997 and the Commonwealth Authorities
and Companies Act 1997, 1999.
- JCPAA, Review of the Financial Management and Accountability Act
1997 and the Commonwealth Authorities and Companies Act 1997, 1999,
p. 34.
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