Public sector is consists of nonprofit organizations which have come into existence primarily to provide services that society, or some segment thereof, feels are needed but cannot be effectively provided by for-profit entities. The public sector includes education, religious, health, civic, and other organizations. These organizations spend considerable sums of money and employ a substantial workforce.
Public financial reporting in the government and private sectors, however, has increasingly come to the attention of the public, regulators, financial sources, investment analysts, and investors. This attention has been heightened by concerns over business activities, the economy in general, and the consequences of inadequate or improper financial reporting for particular corporations and mutual funds.
The nature of the information which the public sector is reported in its financial reports is influence with some of the distinguishing features of it operating environment. These distinguishing features are enumerated as follows (IFAC Public Sector Committee Study 11, 2000):
Ø Generally, the public sector does not exist to make a profit. Instead, the public sector is generally concerned with the welfare of its citizens, determining the best way of financing the goods and services that it wishes to provide to its citizens and establishing the regulatory framework within which business is conducted. Although the functions undertaken by public sector organizations vary across jurisdictions and within differing levels of government, such functions often include the provision of health, education and defense. The absence of a profit motive for most public sector entities apart from business enterprises means that a variety of financial and non-financial performance indicators may be required in order to assess performance.
Ø Governments as a whole tend to obtain most of their revenue from taxes and other non-reciprocal transactions. Unlike the parties to a reciprocal transaction, taxpayers have no choice about entering into the transaction and have no guarantee that they have received value for money. Even where citizens enter into reciprocal transactions with individual government entities those entities may have a monopoly on the provision of a service.
Ø Authorization to use public resources and the management of those resources are usually conducted by different arms of government, the legislature and the executive. The legislature has the right to hold the executive accountable for its management of financial affairs and the use of financial resources entrusted to it. Public sector entities are usually required to demonstrate that to the best of their ability and available resources, they have provided the goods and services required by citizens, at least cost. In contrast, private sector entities are usually accountable to shareholders for making a return on funds employed in a competitive environment, rather than for the nature of the goods and services that they have provided.
With these distinguishing characteristics of the public sector, additional forms of reporting that do not usually form part of the traditional model for private sector financial reporting such as non-financial performance reporting and compliance reporting are being added to the financial reports that the public sector are needed to report.
Generally, the main objective of financial reporting, either in private or public sector, is that information should meet users’ needs. According to the IASC Framework for the Preparation and Presentation of Financial Statements, “The objective of financial statements is to provide information about the financial position, performance, and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions”. (1989, paragraph 12)
In the case of the public sector, financial reporting should demonstrate the accountability of the government or unit for the financial affairs and resources entrusted to it, and provide information useful for decision making by providing and indicating the following (IFAC PSC Study 1, 1991, paragraph 63):
Ø Indicating whether resources were obtained and used in accordance with the legally adopted budget.
Ø Indicating whether resources were obtained and utilized in accordance with legal and contractual requirements, including financial limits established by appropriate legislative authorities.
Ø Providing information about the sources, allocation, and uses of financial resources.
Ø Providing information about how the government or unit financed its activities and met its cash requirements.
Ø Providing information that is useful in evaluating the government’s or unit’s ability to finance its activities and to meet its liabilities and commitments.
Ø Providing information about the financial condition of the government or unit and changes in it.
Ø Providing aggregate information useful in evaluating the government’s or unit’s performance in terms of service costs, efficiency and accomplishments.
The overall goal of external financial statements, either in private or public sector, is to provide information that serves as useful input to users’ decision models. If this goal is to be achieved, the basic financial statements of nonprofit organizations should provide information about:
Ø The amount and nature of the assets, liabilities and net assets of the organization;
Ø The effects of transactions and other events and circumstances that change the amount and nature of net assets;
Ø The amounts and kinds of inflows and outflows of economic resources during a period and the relation between the inflows and outflows;
Ø How an origination obtains and spends cash, its borrowing and repayment of borrowing and other factors that may affect its liquidity; and
Ø The service efforts of an organization.
Communicating useful information can best be achieved by requiring non-profit organizations to provide a Statement of Financial Position, a Statement of Activities and a Statement of Cash Flows.
However, public sector organization and the private sector organizations differ in some aspects of the financial reporting practices. Accountability and rendering of accounts in the public sector were originally connected with the use of financial resources where accountability is based on the presentation of accounts or performance in accounting terms (Tomkins, 1987).
However, since the 1990s, various authors dealing with performance in the public sector have criticized this limited approach (Humphrey et al., 1993, p. 19) and suggested that its scope should be expanded to go beyond the typical accounting justification.
However, in private enterprise the concept of rendering of accounts has been modified as a result of a broadening of the concept of accountability and a broadening of the scope of the information to be provided, its form of presentation and access. In the private sector, we must add to this process of redefining rendering of accounts the harmonization of financial information that is occurring on an international level.
In the field of public administration, the problem of accountability and the rendering of accounts present even greater difficulties since we are talking about public resources, and there are no measurements or indicators that can provide immediate and direct information on performance as profits do for private enterprise. As a result, the type of information provided in order to adequately comply with the principle of accountability takes on a greater importance.
A comparison of regulations reveals the interest there is in financial information serving this purpose: to render accounts. Thus, the Government Accounting Standards Board (1987) in their Concepts Statements, no. 1, considers the objective of public financial information of the public institutions from the point of view of the government’s obligation to be publicly accountable and to permit users to evaluate that accountability.
On its part, the National Council on Governmental Accounting (NCGA) in their Concepts Statements, no. 1 (1982) indicates that the general objective of the accounting and financial information on government bodies consists of:
1. Providing financial information that is useful for taking political, economic, and social decisions and demonstrating responsibility and good management; and
2. Providing information that is useful for evaluating the performance and actions of the organization.
For the NCGA’s document no. 1, financial information and the preparation of financial statements are not synonymous, and financial information is not limited to simply enumerating the things that have been done in the past.
Also, the private and public sector differ on the number of users of the financial information. In the case of the private sector, they are just concern with only one user, the investor.
However, in the field of public financial information the range of users is even broader and, thus, even less precise. The General Public Accounting Plan lists in Section 7 of its introduction the following users:
“Targets for information on public accounting include a very wide range of collectives, from the governing organs of the institutions to citizens as such, along with companies and employers’ organizations, workers and trade unions, suppliers of goods and services, loan companies and other credit institutions, persons responsible for economic, financial and tax policies at their different levels, parliaments and other assemblies, whether legislative or not, organs of outside control responsible to those assemblies and, in general, all those groups that are affected in one way or another by the economic-financial activity of the public sector, which are practically, for one reason or another, and from different points of view, all those who make up the political, economic and institutional fabric of society.”
Such a large conglomeration of targets for financial information on public bodies, together with aspects such as the complexity of the information and the coming into play of the phenomenon of the free-rider, result in a considerable restriction of real users, who at this time can, in practice, be considered to be confined to political institutions and control agencies. A process similar to that which has been initiated in the private sector would involve making the citizen the user or interested party with preferential status.
In addition, in the public sector, the rendering of accounts should begin with the definition of objectives to be achieved. These are not, as in the private sector, objectives that can be taken as self-evident, such as maximizing profits, cash flow, or producing ‘value for the stockholder.’ Thus, it is here that planning and strategic information acquire a particular relevance in public institutions.
Moreover, in the public sector, external control acquires broader forms, ranging from a control of legality to, theoretically, monitoring efficiency, and including financial control and auditing accounts. Thus, again theoretically, public institutions have an advantage over the private sector. It should be kept in mind in this respect that the figure of the audit originated as a means for control of the republic.
However, although there are certain differences in the financial reporting practices of the private and the public sector, there are also some similarities between the practices of these two sectors in terms of the information required to manage, or hold individuals to account for their management of entities. The International Accounting Standards is with relevance and contains much useful guidance to the extent that public sector entities want financial information on cash flows, assets and liabilities, and changes in those assets and liabilities with which the accounting models and accounting standards developed by the private sector. Although private sector standards do not address some of the issues faced by governments such as the recognition of taxation revenues, they provide guidance on many of the other issues faced by governmental accountants.
With the case of governmental financial reports, these are reports which are prepared for a range of external users who are unable to require or to contract for the provision of special reports to meet their specific information needs. The reports are designed to meet the common needs of these external users. Mostly, the external users of the public sector reports have limited access to information and rely heavily, if not exclusively on governmental financial reports.
According to IFA Public Sector Committee Study 11 (2000), governmental financial reports, in common with private sector financial reports, are not intended to provide all the information needed by users.
The scope of governmental financial reports is constrained in the following ways as enumerated by IFA Public Sector Committee Study 11 (2000):
Ø They are financial reports. Items which cannot be quantified are not included in the financial statements totals, although they may be disclosed as additional information in the notes. Users may seek other sources of information, including statistical data, demographic information, narrative assessments, and reports on general economic conditions and the political environment to meet their needs.
Ø They provide information in respect of the reporting entity which has prepared the reports. The reporting entity may be an individual government department or it may be a collection of all government agencies of a certain type. The reports therefore focus on the activities of a government agency or a particular level of government. They do not usually combine information on different levels of government or information on the government and the rest of the economy. Financial information on the entire government sector and the national economy is usually produced by way of Government Finance Statistics and the System of National Accounts or regional equivalents respectively.
Ø They provide information on financial performance rather than service performance. Performance reporting includes information on the nature, quality, quantity, cost etc of the goods and services provided by governments.
Ø They are external reports rather than internal reports. Although senior management may use the information in governmental financial reports, management typically has access to more detailed information for decision making. For example, although the governmental financial reports may measure assets at historical cost, management reports may contain both historic cost and current market values for certain categories of assets.
Ø The basis of accounting underlying the governmental financial reports may differ from that used in the preparation of the budget documents, and accordingly, certain accounting principles may differ between the two. For example, budget documents may contain authorizations for obligations or commitments. Unless obligations or commitments meet the definition of a liability under the accrual basis of accounting, they are not recognized as an element under any basis of accounting described in this Study.
Ø They generally portray the effects of past events. Financial reports prepared at year-end contain information on the impact of transactions and events during the reporting period on the financial performance and position of the entity. Although governments may choose to provide prospective financial information such as forecasts of future events and transactions in their financial reports such information is traditionally found in budget reports only.
Ø Compliance reporting may be incorporated in the governmental financial reports. Although reporting on compliance with budgets and appropriations is an important form of reporting for many government entities, this reporting may be included within a governmental financial report, the budget documents for the next year, or published as a separate report.
“In the public sector, information on service performance may be incorporated as part of governmental financial reports or may be prepared as a separate report. Performance measures and indicators, both planned and actual, can be set out in the budget or plan. Actual results are measured using those measures and indicators. Such information can include comparisons of budgeted and actual output quantity and quality. It may also include a discussion of the relationship between outputs and outcomes. Some governments also report on general economic statistics such as unemployment, Gross Domestic Product, inflation, interest rates, balance of trade etc.” (IFA Public Sector Committee Study 11, 2000)
References
Humphrey, C.; Miller, P.; Scapens, R. W. “Accountability and Accountable Management in the UK Public Sector,” Accounting, Auditing and Accountability, 6, 3, 1993, pp. 7-29.
IFAC Public Sector Committee (1991), Study 1, Financial Reporting by National Governments, IFAC Public Sector Committee
IFAC Public Sector Committee (2001), Study 11, Government Financial Reporting: Accounting Issues and Practices. IFAC Public Sector Committee
IASC (1989) Framework for the Preparation and Presentation of Financial Statements, July (1989)
Governmental Accounting Standards Board. Objectives of Financial Reporting, Concepts Statement no 1. Connecticut, 1987
National Council on Governmental Accounting. Objectives of Accounting and Financial Reporting for Governmental Units, Concepts Statement no. 1. Chicago, 1982.
Tomkims, C. R. Achieving Economy, Efficiency and Effectiveness in the Public Sector, London: Kogan Page Limited, 1987.
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