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www.downloadslide.com Public Sector Accounting Sixth Edition Jones & Pendlebury Public Sector Accounting Sixth Edition Rowan Jones Maurice Pendlebury This book is about government budgeting, accounting and auditing technique, from an accountant’s perspective, in the context of the nature of government, governance and public management, public finance and public money. It deals with the distinctive challenges of performance measurement, budgets and budgetary control, costing, financial reporting and conceptual frameworks, and special issues of audit in the public sector. Generic examples are used throughout the book to illustrate the issues involved. This edition is very different from previous editions in reflecting the fundamental changes in public sector accounting over the past generation, including a narrowing of the differences between government and business accounting. Public Sector Accounting is the ideal choice for any student needing a clear, concise guide to the key issues of this complex, topical subject. About the Authors Rowan Jones is Professor of Public Sector Accounting at the University of Birmingham. Maurice Pendlebury is Emeritus Professor of Accounting at Cardiff University. Front cover image: © Getty Images CVR_JONE0362_06_SE_CVR.indd 1 Public Sector Accounting Rowan Jones Maurice Pendlebury Sixth Edition www.pearson-books.com 12/5/10 11:11:37 www.downloadslide.com PUBLIC SECTOR ACCOUNTING www.downloadslide.com We work with leading authors to develop the strongest educational materials in business and finance, bringing cutting-edge thinking and best learning practice to a global market. Under a range of well-known imprints, including Financial Times Prentice Hall, we craft high-quality print and electronic publications that help readers to understand and apply their content, whether studying or at work. To find out more about the complete range of our publishing, please visit us on the World Wide Web at: www.pearsoned.co.uk. www.downloadslide.com Sixth Edition PUBLIC SECTOR ACCOUNTING Rowan Jones Birmingham Business School Birmingham University Maurice Pendlebury Cardiff Business School Cardiff University www.downloadslide.com Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsoned.co.uk First published under the Pitman imprint in Great Britain in 1984 Second edition published 1988 Third edition published 1992 Fourth edition published 1996 Fifth edition published 2000 Sixth edition published 2010 © Rowan Jones and Maurice Pendlebury 1984, 2010 The rights of Rowan Jones and Maurice Pendlebury to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS. ISBN: 978-0-273-72036-2 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress 10 9 8 7 6 5 4 3 2 1 13 12 11 10 Typeset in 9.5/12.5pt Stone Serif by 35 Printed and bound in Great Britain by Ashford Colour Press Ltd, Gosport, Hampshire The publisher’s policy is to use paper manufactured from sustainable forests. www.downloadslide.com Contents Preface Acknowledgements 1 The nature of the public sector 1.1 1.2 1.3 1.4 1.5 2 3 4 5 The nature of government Governance and public management Public finance Public money Accountants and the public sector vii x 1 2 4 8 10 11 Further reading 16 Performance measurement 18 2.1 2.2 19 27 Non-financial performance measurement Challenges of performance measurement Further reading 29 Fundamentals of accounting 30 3.1 3.2 3.3 31 36 50 Elements of accounting Bases of accounting National accounting and government budgeting Further reading 52 Budgetary policies and processes 53 4.1 4.2 4.3 4.4 54 60 62 62 The rational control cycle Fiscal years Budgeting for inputs, outputs and outcomes Budgetary processes Further reading 65 Form and content of budgets 66 5.1 5.2 5.3 5.4 5.5 67 70 77 82 83 Organisational and programme structures Capital budgets Line item incremental budgets Output measurement and outcomes Zero-base reviews Further reading 84 v www.downloadslide.com Contents 6 7 Budgetary control 85 6.1 6.2 6.3 86 89 93 Further reading 96 Costing 97 7.1 7.2 7.3 7.4 8 9 vi Central financial control Devolved forms of financial control Budget reporting Organisational units, programmes and products Pricing and reimbursement Incremental changes in output Outsourcing 98 104 105 106 Further reading 108 Financial reporting 109 8.1 8.2 8.3 8.4 110 117 123 124 Form and content of published financial reports Accrual accounting: special topics Policymaking Conceptual frameworks Further reading 126 Auditing 127 9.1 9.2 9.3 9.4 9.5 9.6 128 131 133 135 137 139 External auditing Financial and regulatory audits Performance audits Internal control Materiality Budget auditing Further reading 140 Index 141 www.downloadslide.com Preface This book is about government budgeting, accounting and auditing, from an accountant’s perspective. Government budgeting, particularly, can underemphasise – even ignore – accounting. Our purpose is to portray the whole of government, being the core part of the public sector, through the eyes of accountants. We do this by concentrating on the possibilities of accounting technique. Throughout, we combine discussion of the importance of the techniques with their limitations. Nevertheless, the book depends on the importance of accounting technique. Historically and around the world, introductory accounting and intermediate accounting are taught in the context of for-profit organisations. This book assumes a basic understanding of such accounting. Its method is to focus on those matters that can be different in governments, even while there is significant overlap in accounting for governments, non-profits and for-profits. Chapter 1 provides an introduction to the nature of the public sector, the heart of which is the sovereignty of governments ultimately controlled by politicians. It introduces the nature of government, governance and public management, public finance, public money and the role of accountants in the public sector. Chapter 2 is an overview of performance measurement, which permeates all aspects of government budgeting, accounting and auditing. It identifies distinctive challenges of performance measurement for accounting. Chapter 3 details the technical fundamentals of accounting. These are the same in all organisations, whether governmental, for-profit or not-for-profit, but the public sector context shifts the emphasis among these fundamentals. The chapter also discusses two other forms of accounting – national accounting and government budgeting – that complement and sometimes compete with public sector accounting. Chapters 4, 5 and 6 are concerned with budgeting. Chapter 4 deals broadly with budgetary policies and processes. Chapter 5 explains the common forms, and associated content, that government budgets can take. Chapter 6 concerns budgetary control, which is a dominant function of accounting, but one that can be exercised in different ways. Chapter 7 addresses costing techniques, which by their nature are less extensively used in government than in for-profits but, when they are used, can have important consequences for managers, politicians, service recipients and taxpayers. Chapter 8 is about financial reporting. There are significant overlaps between reporting standards for all organisations, but there are distinctive issues for governments – budgetary reporting, consolidated financial statements and special accrual accounting issues. There are also particular issues relating to policymaking and policymakers’ conceptual frameworks. vii www.downloadslide.com Preface Chapter 9 deals with auditing. Here, too, there is much overlap between organisations of all kinds, but the distinctive issues in government are of importance. These are the definition of audit independence; financial, regularity and performance audits; internal audits and internal control; attitudes to materiality; and budget auditing. Every chapter includes a further reading list. These are not usually developments of technical accounting matters. Some of the publications listed are from non-accounting literature, for the accountant to use in a wider understanding of technique. Most, however, are from accounting literature. This typically takes the understanding of technique as given but then situates it in wider contexts, allowing a fuller discussion of the strengths and weaknesses of technique. This is especially necessary given that technical accounting developments tend to be made by accounting’s standard-setting bodies or consultants, not academics. Nevertheless, it remains true that accounting technique and this wider context are difficult to marry. There is little theoretical understanding of the relationship between government accounting systems and social, economic and political success. The further reading lists therefore mainly provide a basis for developing our understanding. The illustrative examples used throughout are generic, for the mythical City of Eutopia, and themselves are based on pure matters of accounting technique. In Eutopia’s financial statements we use generic forms rather than arbitrarily imposing one particular set of accounting standards. The examples use numbers but not mainly for the purposes of training the reader in making calculations. Rather, this is done to make the illustrations more meaningful. We represent Eutopia not as an ideal government but an ideal for understanding the possibilities and limits of government accounting technique. We willingly concede that soldiers, police officers, social workers, teachers and nurses (among others) might imagine that Eutopia is situated on the edges of an infernal place to which its accountants daily commute. This sixth edition is very different from the previous editions. The earlier editions were essentially the first edition, published in 1982, with marginal changes made since then. The sixth edition, however, reflects the fact that there have been fundamental changes in public sector accounting over this last generation and a half – changes that no doubt, in part, have been facilitated by the information revolution we are living through. The major changes since the 1970s are that there were then no sets of public sector accounting standards, but now there are, including one international set, and some of them are based on for-profit standards. The only set of public sector auditing standards then was that used by the US Federal Government, known (as it still is) as the Yellow Book. It was, however, actually a booklet of 54 small pages. Also, the recording, use and publication of output measures were then the exception, but now they are ubiquitous. The result of all these changes is that there has been a narrowing of the differences between government, non-profit and for-profit accounting. The changes have also brought greater comparative understanding of government accounting between jurisdictions within each country and between countries. No longer is it possible to make the joke, as one professor did in 1986 when introducing a seminar on ‘international government accounting’, that the term viii www.downloadslide.com Preface seemed to him to be an oxymoron. Having said that, Anglophone accounting still dominates the discourse (if quantity of literature is the measure), which is an especially troubling matter given that, presumably, most government accounting in the world is not practised in English. This book does not help in this: it is firmly Anglophone, primarily as a generalisation of UK and some US theory and practice. Rowan Jones and Maurice Pendlebury ix