Contemporary Issues in Social Accounting for Public Sector Organizations

Chapter 8: Social Accounting and Public-Sector Organisations Contemporary Issues in Social Accounting

Chapter Structure Introduction The nature of public sector accounting Who is responsible for public sector crisis? Public policy Pressures to address Public Private Partnership Public sector management initiatives corporate governance and accountability The role of local governments in public sector accounting

Introduction Public sector illustrates the sovereignty of citizens who transfer their power to sovereign governments and the main target is not profit maximisation. After World War 2, we have the development of the welfare state and the expansion of the public sector. From the 1980s, the rise of neo-liberalism questioned the role of public sector. The global crisis of 2008 and the austerity measures put pressure on, and created new challenges for, the public sector.

The nature of public sector accounting Traditional techniques of accounting are essential but they are not sufficient. Accounting is more important to investors than for voters. Accounting cannot operate in isolation from the wider social, political and economic environment. Public sector accounting should not focus only on technical aspects but on the wider context in which public sector operates.

The nature of public sector accounting (2) Three main pillars of public sector accounting External reporting and accountability Financial planning and control Value for money and performance review

Public sector crisis Austerity measures. Calls for decrease of social expenses. Domination of neo-liberal agenda. Need for public sector restructuring.

Who is responsible for the crisis? Corporations? Austerity? Politicians? Citizens?

Who is responsible for the crisis? Corporations? A lot of blame placed on the banking sector. The recession burdened the banks, toxic assets emerged as a result of creative accounting. Governments undertook initiatives for bank rescue (recapitalizations, government guarantees and quantitative easing). For this reason, governments decreased public spending in favour of the banks.

Who is responsible for the crisis? Austerity? Austerity aimed to reduce public debts and deficits. The actual results of austerity are controversial. Public spending is decreased but austerity s effect over the long- term performance of a country is in question. There was an excessive focus on reducing cost which ignored the quality of the provided services.

Who is responsible for the crisis? Politicians? Politicians are the main stakeholder of the public sector, they are the ultimate decision makers. Historically, they were manipulating public sector in order to achieve personal benefits. Corruption phenomena were always increasing waste of resources and they were decreasing the quality of services. They do not make decision depending on purely economic targets.

Who is responsible for the crisis? Citizens? Some claimed that the citizens had unrealistic demands of politicians. The responsibility of citizens is grounded in the context of democratic participation. They have to apply pressure to achieve more transparency, accountability and the better use of resources.

Public Policy Public policy includes the means in which the state provides services to the citizens. It is a complex system of decision making which includes a lot of stakeholders with different interests. Accounting represents quality of information so it is very important for decision making, especially in such complex environments. Accounting could restrain the interference that the stakeholders might attempt.

Public policy (initiatives) The main initiative was the New Public Management (NPM). Initiative from Margaret Thatcher for more efficient public sector. Aimed to introduce private sector mechanisms to public sector. Received wide acceptance from OECD countries. It was mainly a right-wing approach.

Public policy (initiatives) Another important initiative was Citizen s Charters. Its target was to enhance the role of citizens in public policies. It tried to combine both left and right ideas. It challenged the focus on reducing public expenditure. However, the criticism was that it provided just a vague framework of principles.

Pressures to address Except bank recapitalization, the crisis resulted huge social inequalities (Almost 2,8 billion people live on less than $700 a year, while the global health is rising). Public services were needed to fight global poverty. However, the crisis affected the ability of governments to provide services to citizens. Public sector is receiving pressure from neo-liberalism and from increased privatisations.

Pressures to address (neo-liberalism) The end of the cold war and the prevalence of free market capitalism resulted increasing globalisation. Neo-liberalism calls for the global deregulation of economic transactions. These deregulations are mainly the privatisation of public services and the treatment of public spending as a cost of international production.

Pressures to address (neo-liberalism, 2) The global shift to market capitalism reflects the neoliberal belief of state failure to deliver public welfare services. The economic, social, and political measures pursued in support of the neoliberal project generally seem to involve a paradoxical increase in intervention. International policy makers persuaded the global community to soften their political boundaries in order to compete in the global market.

Pressures to address (neo-liberalism, 3) There are claims that neo-liberalism increased social inequalities as it considered profit more important than people. In weaker counties, human rights, labour rights and environmental sustainability are being exploited in favour of more profit. Multinational companies and international institutions were used as siege machines in order to bypass regulation and ensure capitalistic goals.

Pressures to address (neo-liberalism, 4) Thus, a lot of countries decide to comply with the demands of neo-liberalism under the fear of possible consequences. However, neo-liberalism has also some failures over the years. In developing countries there was a failure in the enforcement of neo-liberal shifts because of unexpected economic and financial crisis. For this reason, neo-liberalism has developed concerns for managing social and environmental costs.

Pressures to address (declining public sectors and increased privatisation) After the crisis, there is an immense pressure on the states for better utilization of resources and enhanced provision of public services. An efficient and effective public sector will bring multiple benefits as it will contribute to the maintenance of social stability. Most of the reforms after 2008 focused on downsizing the public sector. Although equal access to healthcare, education, transport and energy has an important role in decreasing social inequalities, little attention was paid towards the redistributive capabilities of public sector.

Pressures to address (declining public sectors and increased privatisation, 2) Public services, which are used mainly by poor or middle-class people, have been taken over by private firms due to the neoliberal regime shift. Additionally, after the crisis the influence of labour unions was decreased as collective bargaining changed. Harsh austerity needed equal revenue and expenditure and in that sense, employees were treated just as costs. Reactions, strikes and democratic protest now have much less influence on governments.

Pressures to address (declining public sectors and increased privatisation, 3) The global public sector will continue to change unless alternative paths of economic, social and political rearrangements are explored. There are voices who claim that inequality could not be stopped with policies of privatization and shrinkage of public sector that the neo-liberal agenda has imposed. Citizens and taxpayers need to regain control of their governments.

Public Private Partnership One way of addressing the growing problems of public sector is by building a dynamic relationship between public and private sector, known by the popular term Public Private Partnerships (PPPs). PPPs are usually seen as a vehicle for bringing together resources, including skills and knowledge, of both public and private sector. It had significant appraisal globally regardless the economic condition of each country.

Public Private Partnership(2) PPPs have the potential to reduce the burden on strained public resources, also it provides access to private finance for expanding or improving public services. Moreover, PPPs are greater value-for-money for public projects as it provides an opportunity to rethink existing public service models in a more holistic way. However, there are some criticism for the effectiveness of PPPs but, it is important to focus on citizens rather than on individuals.

Corporate governance and accountability Two concepts have been at the centre of public sector management initiatives: Corporate governance. Accountability. These concerts are not separate from each other and there is a field of overlap.

Corporate governance and accountability(2) Governance is a very important concept in regards of both private and public sector. Corporate governance refers to structures, rules, procedures and mechanisms for the proper steering and controlling of corporations. Public sector governance includes mechanisms, tools, approaches and structures which define the responsibilities of stakeholders concerning the organisation, and systems for internal control and external accountability. It illustrates the responsibility of governance show to the public that the organisation performs well.

Corporate governance and accountability (3) New Public Governance was a public sector management initiative which aimed to be a continuation of NPM. It did not have the same focus on private sector mechanisms and it attempted to coordinate all the stakeholders of public sector by using institutional arrangements in order to improve policy-making.

Corporate governance and accountability (4) The main difference between NPM and NPG is that NPM is more hierarchical and it is based on contractual relationships, while NPG recognises the significance of interdependent horizontal relationships. Another difference of these initiatives is related to accounting aims. NPM aims to minimize the cost by managing the outputs and NPG aims to provide a more completed and consolidated accounting framework.

Corporate governance and accountability (5) One of the main concepts of public governance is accountability, which examines the provision of services and the impact of policies on the society. Hodges (2012) identified two forms of accountability: Vertical and Horizontal

Corporate governance and accountability (6) Vertical accountability is related to the legal structures of the public sector (how accountability flows from institutions to citizens). Horizontal accountability refers to the moral and social obligations that organisations have towards the stakeholders (how different organisations perceive accountability). In most developing countries citizens have low level of confidence in horizontal mechanisms alongside dissatisfaction on the efficiency of vertical forms of accountability because of the implementation of electoral choice and the collective effort of pressure by civil society organisations.

Corporate governance and accountability (7) Accountability is related to the demand for good performance, to answerability and transparency, and there can be various forms of accountability mechanisms such as disclosure statements, annual reports, requirement for internal or external audit and the right of public to information. Typically, accountability flows towards the higher echelons of hierarchy and is concerned with the delegation of power from principals to the agents and with the ways in which the relationship between them will be defined.

Corporate governance and accountability (8) Within public sector, it is not clear who is the principal and the agent, because of the existence of citizens, politicians and managers. Thus accountability is split between political and managerial accountability. In political, citizens are the principals and politicians are the agents. In managerial, politicians are the principals and the managers of organisations are the agents.

Corporate governance and accountability (9) Political accountability includes the ways in which politicians make themselves accountable to the citizens, in order for the citizens to see whether they have fulfilled their promises. Managerial accountability is related to the ways in which managers are accountable to the politicians. This complexity in public accountability illustrates a potential conflict between these two types of accountability as, politicians might try to manipulate managers in a way that could help them exploit a situation of political purposes.

Corporate governance and accountability (10) In private sector, investors are the main users of financial information. In public sector the users of financial information can be a huge group of heterogeneous stakeholders such as investors, shareholders, lenders, creditors, employees, consumers of services, interest groups, auditors, governments, media and voters. It is evident that each group has different interests and it will focus on different elements of accountability and, thus, the role of public accountability is very complex challenge.

Corporate governance and accountability (11) Concluding, public governance can increase transparency and accountability, and improve democratic legitimacy and performance simultaneously. Additionally, governance must ensure that all citizens will have the same rights over the use of resources and contribute to the enhancement of social equality. On the other hand, regardless of the framework of governance, those who govern must be accountable for their actions and accountability is a core value for democratic governance.

The role of local governments Governments have put increasing attention to local governments for the success of public sector. Local governments can have an impact on the daily life of citizens and thus, they need comprehensive information in order to enhance transparency and accountability. In other words, local governments can create fertile ground for the use of accounting within a micro-management context which can improve the performance of public sector in a long run However, there might also be a conflict of interests with the central government.

Summary The evolution of public sector accounting must be examined in line with the evolution of public sector and with the influence that it had from the wider environment in which it has operated. The main initiatives of public policy were NPM, Citizen s Charters and NPG. The crisis of 2008 was a turning point because of neo-liberalism which imposed privatisations and public sector declining.

Summary (2) In this context, the role of accounting has been even more important as it can provide information which will ensure the democratic use of funds, and it will create a context of governance and accountability which will not only improve efficiency but also transparency and democratic participation. Accounting must be in a comprehensive and understandable language in order to constitute a weapon to the hands of the citizens. Concluding, it is evident that every technical aspect of accounting must be examined in the general social level.