Going Round in Circles, or the Spiral of Progress? Financial Reporting Regulation for Government and Public Sector in New Zealand

Abstract

This project examines in detail how stakeholders lobbied a set of 2011 proposals to radically change financial reporting regulation for Government and Public sector in New Zealand. Did public sector stakeholders anticipate and effectively lobby ex ante consistent with their ex poste views on the shift from IFRS based standards towards IPSAS-based standards? When any country moves towards IPSASB standards for their public sector financial reporting, how are the key stakeholders likely to react? Local Government and Government Departments are competing for reputation, efficiency and effectiveness, and the threatened cost of change is great. Great in terms of time taken to learn, to reading, to adapt etc. all of which draws the attention of managers away from their core business of offering services to their stakeholders. The lens Bourdieu offers in this analysis shifts our understanding of the consciousness in these stakeholders, who are anticipating a loss of a range of types of capital, and even losing the battle in the field of struggles of intra-bureaucracy warring. The Bourdieu lens also draws the individual habitus to our attention, as these lobbyists clearly share some common tendencies and pre-dispositions, resulting in the threads of commonalities surfacing in their reactions, as documented in this study. These findings offer, in a sense, a snapshot of the views of these stakeholders facing change.

In the age of post-Weberian bureaucracies, there is a widespread tendency of government department bureaucracies to be operating in a field, an arena, where one government organisation has the power to influence its neighbourhood bureaucracies, and may, at times, drive constant change processes. Nowhere is this clearer than in the field of regulation of government reporting in New Zealand. As described by Laswad and Botica Redmayne (2013), financial reporting in the NZ public sector has experienced major changes in the last 20 years, from developing sector neutral NZ standards for application in both private and public sectors in the 1990s to the adoption of IFRS-based standards in 2005-2007. In general terms, this has resulted in a high level of transparency and high quality financial information provided by the NZ public sector to NZ citizens. NZ topped the list of 100 countries in a recent survey by the International Budget Partnership on the transparency surrounding government budgets. So why change? Why move away from an accepted set of reporting requirements, as proposed in 2010, which appeared to be successfully meeting user needs.

What had a 'sector neutral' approach meant? In the 1990s both New Zealand and Australia had followed a sector-neutral philosophy in relation to financial reporting standards -- i.e. there was one set of GAAP requirements for all entities, whether for-profit, public or third sector organisations (Baskerville and Pont Newby, 2002, Bradbury and van Zijl, 2007, Cordery, 2013, Irvine and Ryan, 2013, Breen, 2013). The history of governmental standard setting in New Zealand covers a number of different periods in respect of standard-setting activity and the scope of application of the standards.

The three periods are the introduction of public sector standards, the introduction of sector neutral standards and the effect of the introduction of international accounting standards. The New Zealand Institute of Chartered Accountants (NZICA) had been setting standards since 1946, but until the late 1970s was confined to private sector entities. Recognition of the need to provide guidance to the public sector and governments on financial reporting resulted in the establishment of a series of statements specifically for public sector entities. However, in 1992 the Institute resolved that in future its standards would be sector neutral (Devonport and van Zijl, 2010). For around two decades, New Zealand implemented this sector-neutral approach to accounting standards. Following the 2009 Discussion document produced by the Accounting Standards Review Board (ASRB) – which has now been reconstituted to be the External Reporting Board (XRB) – submissions were invited on the proposed change from using a sector neutral set of New Zealand International Financial Reporting Standards (NZIFRS) to a specific set of International Public Sector Accounting Standards (IPSAS) for Public Benefit Entities (PBEs) and Not-For-Profit entities (NFPs) in New Zealand. In the discussion document the ASRB repeatedly referenced the better service of ‘user-needs’ as part of the cost-benefit analysis that lead them to the decision to move to sector-specific standards. With the ASRBs focus on user-needs, the views of stakeholders in the public sector with regard to the cost-benefit of the move to sector-specific standards are of interest, and provide the core data for the analysis in this report.

New Zealand was not alone in this. The last 30 years have seen public sector accounting in many countries undergo similar considerable changes. More recently, some governments adopted accrual accounting and International Public Sector Accounting Standards (IPSAS), others adopted modified International Financial Reporting Standards (IFRS) while others remained with cash-based accounting. Accrual accounting has attracted a certain amount of research to date, investigating the benefits of accrual accounting in various contexts, such as Jones and Puglisi 1997; Adriani et al. 2010; Kober 2010; Kober et al. 2013. Respondents in such studies who have prior experience in using a particular reporting framework are found to perceive that framework as more useful than managers who did not have such prior experience. Overall, Guthrie (1998) determined that accrual accounting may be expected to provide more accurate assessments of the costs of services, and an improved indicator of efficiency in the public sector. Robb and Newberry (2007) also considered accrual accounting to be more suitable for accounting for assets, as well as long-term projects ; it has the potential to extend the focus of accounting to include non-cash transactions pertinent to decision making (Robb and Newberry, 2007).

Thus the New Public Management in NZ, as elsewhere, is characterised by the introduction of business accounting principles, accrual accounting in particular (Christiaens et al. 2010). The study by Pina and Torres (2003) suggested accrual accounting provides better information about solvency in government entities, and more useful in determining costs of services offered to the public. But apart from general agreement on that, over the last few years it has become clear that there is no consensus on which particular accounting standards are best suited for the public sector (Lapsley et al. 2009). As described by Laswad and Botica Redmayne (2013), further changes in NZ GAAP for public benefits entities have occurred in the 2011-2012 period when the New Zealand External Reporting Board (XRB) developed separate reporting frameworks for the public and not for profit sector. In April 2012, the NZ Minister of Commerce approved the new Accounting Standards Framework, signifying another tranche of changes for public sector reporting. Subsequently, in June 2012, the XRB issued a package of exposure drafts on new standards for public benefit entities.

This project examines in details how these stakeholders lobbied on the proposals in this package of exposure drafts. This provides an invaluable set of data which to compare these findings of Laswad & Botica Redmayne (2013). Did public sector stakeholders anticipate and effectively lobby ex ante consistent with their ex poste views on the shift from IFRS based standards towards IPSAS-based standards? When any country moves towards IPSASB standards for their public sector financial reporting, how the key stakeholders are likely to react, and are there steps which can be taken in order that such implementation can progress smoothly.

Our finding showed that what was often expressed in the submission letters was an overarching concern of the cost-benefit of the move especially for the smaller NFPs, whom previously may not have needed to hire professional accountants, but would be compelled to if their volunteers no longer had sufficient expertise in order to prepare the financial statements for the entity. Having to utilize resources in order to hire a professional to prepare the financial statements would reduce the resources these NFPs would have to fulfil their mandate. These financial difficulties would be compounded by the reduced network of professionals that has been repeatedly referenced in the submissions, as this is a reduction in the social capital of these entities, whom no longer have same resource of professionals, for as put forward in the submissions, there would be fewer with the relevant knowledge needed.

This represents a loss of social capital for PBEs and NFPs as they no longer have the same network of professionals to utilise as a resource. This in turn is also recognised as a loss of economic capital, as the entities incur additional expense in order to either train their existing staff to be familiar with the new standards, or to hire staff that already possess that knowledge. However, in the largest public sector entities the resistance to the change reflects a direct threat to the habitus; and this is not meaning the public sector ethos. Habitus is each individual’s disposition (The “feel for the game”; predispositions; tendencies; inclinations; properties; perceptions and appreciations structured by each person's past and present circumstances). And when comfortable with one set of regulations, the constancy of change drives the respondents to critique the change drivers with any tools to hand, such as the submission process. In the study by Laswad and Botica Redmayne, they term this the 'experience effect', meaning that "the reluctance of preparers of financial statements to abandon NZ IFRS is understandable given the level of change in NZ public sector reporting in the last five to seven years. In addition, given the seniority, background and the experience of the respondents, these findings are consistent with the 'experience effect', that is managers who have prior experience in using a certain reporting framework rate that framework more useful that managers who don’t have such prior experience" (2013, page 13).

This study offers a different interpretation: these bureaucracies of Local Government and Government Departments are competing for reputation, efficiency and effectiveness, and the threatened cost of change is great. Great in terms of time taken to learn, to reading, to adapt etc. all of which draws the attention of managers away from their core business of offering services to their stakeholders. The lens Bourdieu offers refines this 'experience effect', and shifts it to a deep consciousness in these stakeholders, who are anticipating a loss of all types of capital, and even losing the battle in the field of struggles of intra-bureaucracy warring. Using the lens of Bourdieu also draws the individual habitus to our attention, and these lobbyists clearly share some common tendencies and pre-disposition, resulting in the threads of commonalities surfacing in their reactions, as documented in this study. There are limitations of these findings, as it offers, in a sense, a snapshot of the views of these stakeholders facing change. Now we are seeing the roll-out of the new Public Sector standards, maybe they will find them not too different after all, and settle back into business as usual, coming the full circle again to sector specificity in New Zealand.

Keywords: New Zealand, IPSAS, accounting standards, public sector, whole of government

JEL Classification: M41, L30, H10, H70