Public SectorAccountingrowAn JoneSMAurice Pendlebury

Sixth EditionThis book is about government budgeting, accounting and auditing technique, from an accountants 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 AuthorsRowan Jones is Professor of Public Sector Accounting at the University of Birmingham.

Maurice Pendlebury is Emeritus Professor of Accounting at Cardiff University.

Public SectorAccountingrowAn JoneSMAurice Pendlebury

Sixth Edition

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Public Sector Accounting Sixth Edition JoneS & Pendlebury

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PUBLIC SECTOR ACCOUNTING

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Sixth Edition

PUBLIC SECTORACCOUNTING

Rowan Jones

Birmingham Business SchoolBirmingham University

Maurice Pendlebury

Cardiff Business SchoolCardiff University

Pearson Education LimitedEdinburgh GateHarlowEssex CM20 2JEEngland

and Associated Companies throughout the world

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First published under the Pitman imprint in Great Britain in 1984Second edition published 1988Third edition published 1992Fourth edition published 1996Fifth edition published 2000Sixth edition published 2010

Rowan Jones and Maurice Pendlebury 1984, 2010

The rights of Rowan Jones and Maurice Pendlebury to be identified as authors of thiswork have been asserted by them in accordance with the Copyright, Designs and PatentsAct 1988.

All rights reserved. No part of this publication may be reproduced, stored in a retrievalsystem, or transmitted in any form or by any means, electronic, mechanical,photocopying, recording or otherwise, without either the prior written permission of thepublisher or a licence permitting restricted copying in the United Kingdom issued by theCopyright Licensing Agency Ltd, Saffron House, 610 Kirby Street, London EC1N 8TS.

ISBN: 978-0-273-72036-2

British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the British Library

Library of Congress Cataloging-in-Publication DataA catalog record for this book is available from the Library of Congress

10 9 8 7 6 5 4 3 2 113 12 11 10

Typeset in 9.5/12.5pt Stone Serif by 35Printed and bound in Great Britain by Ashford Colour Press Ltd, Gosport, Hampshire

The publishers policy is to use paper manufactured from sustainable forests.

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Contents

Preface viiAcknowledgements x

The nature of the public sector 11.1 The nature of government 21.2 Governance and public management 41.3 Public finance 81.4 Public money 101.5 Accountants and the public sector 11

Further reading 16

Performance measurement 182.1 Non-financial performance measurement 192.2 Challenges of performance measurement 27

Further reading 29

Fundamentals of accounting 303.1 Elements of accounting 313.2 Bases of accounting 363.3 National accounting and government budgeting 50

Further reading 52

Budgetary policies and processes 534.1 The rational control cycle 544.2 Fiscal years 604.3 Budgeting for inputs, outputs and outcomes 624.4 Budgetary processes 62

Further reading 65

Form and content of budgets 665.1 Organisational and programme structures 675.2 Capital budgets 705.3 Line item incremental budgets 775.4 Output measurement and outcomes 825.5 Zero-base reviews 83

Further reading 84

5

4

3

2

1

Contents

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Budgetary control 856.1 Central financial control 866.2 Devolved forms of financial control 896.3 Budget reporting 93

Further reading 96

Costing 977.1 Organisational units, programmes and products 987.2 Pricing and reimbursement 1047.3 Incremental changes in output 1057.4 Outsourcing 106

Further reading 108

Financial reporting 1098.1 Form and content of published financial reports 1108.2 Accrual accounting: special topics 1178.3 Policymaking 1238.4 Conceptual frameworks 124

Further reading 126

Auditing 1279.1 External auditing 1289.2 Financial and regulatory audits 1319.3 Performance audits 1339.4 Internal control 1359.5 Materiality 1379.6 Budget auditing 139

Further reading 140

Index 141

9

8

7

6

vii

Preface

This book is about government budgeting, accounting and auditing, from anaccountants perspective. Government budgeting, particularly, can underempha-sise even ignore accounting. Our purpose is to portray the whole of govern-ment, 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 withtheir limitations. Nevertheless, the book depends on the importance of account-ing technique.

Historically and around the world, introductory accounting and intermediateaccounting are taught in the context of for-profit organisations. This bookassumes a basic understanding of such accounting. Its method is to focus onthose matters that can be different in governments, even while there issignificant overlap in accounting for governments, non-profits and for-profits.

Chapter 1 provides an introduction to the nature of the public sector, theheart 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 thepublic sector.

Chapter 2 is an overview of performance measurement, which permeates allaspects of government budgeting, accounting and auditing. It identifies distinc-tive challenges of performance measurement for accounting.

Chapter 3 details the technical fundamentals of accounting. These are thesame in all organisations, whether governmental, for-profit or not-for-profit, butthe public sector context shifts the emphasis among these fundamentals. Thechapter also discusses two other forms of accounting national accounting andgovernment budgeting that complement and sometimes compete with publicsector accounting.

Chapters 4, 5 and 6 are concerned with budgeting. Chapter 4 deals broadlywith budgetary policies and processes. Chapter 5 explains the common forms,and associated content, that government budgets can take. Chapter 6 concernsbudgetary control, which is a dominant function of accounting, but one that canbe exercised in different ways.

Chapter 7 addresses costing techniques, which by their nature are less exten-sively 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 betweenreporting standards for all organisations, but there are distinctive issues for governments budgetary reporting, consolidated financial statements and specialaccrual accounting issues. There are also particular issues relating to policymakingand policymakers conceptual frameworks.

Preface

viii

Chapter 9 deals with auditing. Here, too, there is much overlap between organisations of all kinds, but the distinctive issues in government are of import-ance. These are the definition of audit independence; financial, regularity andperformance audits; internal audits and internal control; attitudes to materiality;and budget auditing.

Every chapter includes a further reading list. These are not usually develop-ments of technical accounting matters. Some of the publications listed are fromnon-accounting literature, for the accountant to use in a wider understanding oftechnique. Most, however, are from accounting literature. This typically takes theunderstanding 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 bemade by accountings standard-setting bodies or consultants, not academics.Nevertheless, it remains true that accounting technique and this wider contextare difficult to marry. There is little theoretical understanding of the relationshipbetween government accounting systems and social, economic and political success. The further reading lists therefore mainly provide a basis for developingour understanding.

The illustrative examples used throughout are generic, for the mythical City ofEutopia, and themselves are based on pure matters of accounting technique. InEutopias financial statements we use generic forms rather than arbitrarily impos-ing one particular set of accounting standards. The examples use numbers butnot mainly for the purposes of training the reader in making calculations. Rather,this is done to make the illustrations more meaningful. We represent Eutopia notas 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 imaginethat Eutopia is situated on the edges of an infernal place to which its accountantsdaily commute.

This sixth edition is very different from the previous editions. The earlier editions were essentially the first edition, published in 1982, with marginalchanges made since then. The sixth edition, however, reflects the fact that therehave been fundamental changes in public sector accounting over this last gener-ation and a half changes that no doubt, in part, have been facilitated by theinformation revolution we are living through. The major changes since the 1970sare that there were then no sets of public sector accounting standards, but nowthere are, including one international set, and some of them are based on for-profit standards. The only set of public sector auditing standards then wasthat 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 andpublication of output measures were then the exception, but now they are ubi-quitous. The result of all these changes is that there has been a narrowing of thedifferences between government, non-profit and for-profit accounting.

The changes have also brought greater comparative understanding of govern-ment accounting between jurisdictions within each country and between coun-tries. No longer is it possible to make the joke, as one professor did in 1986 whenintroducing a seminar on international government accounting, that the term

Preface

ix

seemed to him to be an oxymoron. Having said that, Anglophone accountingstill dominates the discourse (if quantity of literature is the measure), which is anespecially troubling matter given that, presumably, most government accountingin the world is not practised in English. This book does not help in this: it isfirmly Anglophone, primarily as a generalisation of UK and some US theory andpractice.

Rowan Jones and Maurice Pendlebury

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Acknowledgements

The authors acknowledge, with the usual caveat exempting them from blame,the following, who have personally helped over the years in our understandingof public sector accounting: in the USA, Gary Giroux and James Patton; in Europe,within the Comparative International Governmental Accounting Research net-work (CIGAR), Klaus Lder and Aad Bac, and Berit Adam, Eugenio Caperchione,Jan van Helden, Susana Jorge, Evelyne Lande, Frode Mellemvik, Norvald Monsen,Vicente Montesinos, Riccardo Mussari, Salme Nsi, Kuno Schedler, Jean-ClaudeScheid and Torbjrn Tagesson.