The use of accrual accounting in New Zealand's central government: Second thoughts

Abstract

Business-style accrual accounting for governmental budgeting and financial reporting is widely promoted as appropriate for governments and promoted as successful in the countries that have already adopted it. There are, however, both constitutional and democratic reasons for close attention to their implications and effects. Accounting has a power of its own and, matters that “appear on the surface to be technical … can be found to be intimately tied up with political, behavioural and constitutional concerns” (Pallot, 1991a). Drawing on the case of New Zealand, a leader in adopting these practices, this article notes the constitutional weakness of that country's fused executive and legislature and shows that the business-style governmental budgeting and financial reporting system have strengthened the executive government's powers over public finance. Unlimited power, without prior parliamentary scrutiny, is delegated to the Minister of Finance to conduct all borrowing, lending, investing and financial market activities. Public attention is directed to a fiscal target focused on net debt and thus deflected from the gross figures that reveal a pattern of increasingly leveraged public assets and deepening government immersion in capital markets. There is a danger that misunderstanding of business-style financial information by politicians and officials alike may lead to inappropriate policies and actions, and the inclusion of biases (known as incentives) in detailed financial rules that affect the financial reports increases that danger. With the direction of change in accounting standard-setting being to target sophisticated financial market analysts as the users of published financial reports, the likelihood that the “vast majority of readers will not understand [governments'] published financial reports” (Damant, 2003) carries with it constitutional and democratic implications that require further thought.