Introduction of Accrual Accounting Over
Cash Accounting in The Public Sector

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Compiled by CPA Robert Odek

Are Associated Risks Ignored?

Recent literature shows that movement from cash to accrual accounting in the public sector is encouraged. The question is whether the risks accrual accounting comes with are considered or ignored.There are two major methods of reporting, thus, cash accounting and accrual accounting. The cash accounting method requires that a transaction be considered only where there is a actual cash exchange. That is, income is recorded when there is an actual cash receipt or expense recorded if there is actual spending of cash.

On the other hand, accrual accounting methods recognize the income when a sale is made. In other words, the company does not require to hold the actual cash to recognize an income. That is, a sale is recorded as soon as an invoice is issued, or a delivery note is dispatched. Studies show that cash accounting has been observed as a mere budgeting tool. That is, when applied in the public sector,its aim is then to compare the budgets with expenditures.

Proponents of the cash accounting method acknowledge that using the cash accounting technique comes with simplicity in reporting. Besides, it is quite objective hence decisions are easy to make as itprovides the decision maker with fewer options to choose from. It prevents the management of earnings since there are no chances of accumulating financial report items that may be used in creativeaccounting. Accrual accounting is considered to measure the present revenue of a company.

It is therefore argued that accrual accounting is predictive to a greater extent and really presents the true and fair position of an enterprise.

Discussion of Accrual Accounting risks

Accrual accounting dates back to 1980 with the advent of New Public Management. Recent studies show that the introduction of accrual accounting results in opposition to transformation among employees so that the previous culture is considered better. Additionally, accrual accounting results in unreliable reports which are not transparent. It has empirically been proven that one way that executives use in practicing earnings management is the accrual concept.

For instance, in companies where executive compensation is tied to the performance of the managers, the administrators would opt to apply accrual accounting (recognizing the expense on a later date so as not to reduce the revenue and inflate earnings resulting in more bonus pay). This was the case at Enron the United States which its case has been unanimously consented to have participated in the world financial crisis.

The administration of accrual accounting techniques in an organization comes with higher costs including valuing the property, determination of salvage value, introducing particular software, and retraining staff. If this can be the case in the whole government departments, then in a particular financial year, a country would forgo development and focus on accrual costs. Moreover, it increases the loss of control by the central government.

In other words, it is a principle-based method so that the accountant has the freedom to make a professional judgment in implementation. However, practical situations suggest that even with the lawbeing the criteria, there are numerous corruption and misuse of public sector resources. So what then does this imply with the discretion at the mercy of the public sector accountant? It implies a lack of reliability in the reported economic records.

It is at the discretion of the accountant to report what in his view those charged with governance or the major stakeholders wish to receive. Then the decision usefulness objective of accounting information will be a thing of the past. Earnings management (creative accounting) is eminent with the full adoption of the accrual accounting method in the public sector.

Management of earnings implies a situation where the accountant, manager, executives, or those charged with the daily operations of an enterprise uses their discretion to misreport with an aim of pursuing self-interests that in a real sense could be misleading and do not reflect the true view of the organization’s position. Studies show that creative accounting has been widely practiced in the private sector amongst managers and to a smaller extent in the public sector.

I attribute the smaller extent of creative accounting in the public sector to the government departments that implement accrual accounting like the universities. The accrual model is considered to be efficient, and it would promote competition just as in the private sector. However, the object of most government
departments is not profit-making. Thus applying the accrual method of accounting with an aim ofcompetition may not be the correct foundation of thought.

In developing countries like Kenya, it is almost a general consensus that accounting officers are not yet ready to work outside the laid down national laws evidenced by high number of cases of corruption.

Analogy of accrual accounting risk.

Giving an analogy of the National Government Constituency Development Fund, it applies the cash accounting method in its reporting. It is argued that cash accounting does not report the position of assets in the financial reports. However, based on the objective of this fund, cash accounting best suits it. That is, the fund is a grant. Its main objective is to enhance socio-economic development in Kenyan rural setups.

Thus by design, the fund is envisaged to be received from the exchequer, disbursed to the constituency level, and then to the final project committees for implementation. So that only what is received is what is utilized in development projects. However, with the introduction of accrual accounting in the management of the fund, it implies, that the accountants and Fund Account Managers, may practice virement in various vote heads.

That is, accrual accounting promotes implementations on a rolling basis and spending outside the specified budgets. This would be more disastrous than where the assets are accounted for as additional
information to the financial statements in the application of the cash accounting system.

The wholesome cash accounting method possesses weaknesses. Economic activities are not reported
without any actual movement of cash. This has therefore to a greater extent allowed various governments to practice deferrals of disbursements of funds to various departments which delays development activities. Besides, cash accounting may promote misuse of government assets without being detected.

Despite the wide acknowledgment of accrual accounting, it poses a major loss of the decision usefulness objective of the financial reports since it offers the public sector accountants the discretion to report what interests them without the minimal possibility of being noticed by the public. Therefore, accrual accounting encourages creative accounting which is really detrimental. Evidence also has it that the financial crisis resulted from the implementation of accrual accounting.


Governments may consider a hybrid model of accounting in the public sector such that a greater portion of the financial reporting is based on cash accounting, while the weaknesses of cash accounting are bridged by the accrual perspective. Using the analogy above, while developing the financial reportingtemplate, the National Treasury of Kenya may consider making reporting the NG-CDF assets part of the financial reports so that the organizational financial report is complete.

This will go a long way in mitigating economic losses which may have resulted from creative accounting.

CPA Robert Odek is a holder of CPA (K), BCOM-Accounting option from Catholic University of Eastern Africa, a Master of Science (MSC) in Accounting and Finance from JKUAT and currently undertaking Ph.D. in Accounting at JKUAT.


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