1.

0 History of Public Sector Accounting in Malaysia

Unlike developed countries, British colonised developing countries experienced,
practiced and enforced British law and accounting practices into their own legislation and
statutes even after their independence. (Othman & Nath, 2010) This is also not an exception
for Malaysia. Even after gaining independence, the influence of British can be seen in the
management of public sector, management of public fund, public employee behaviour and
more. Having said that, there was progress through the years in modernisation of the
administration system especially in economy and financial areas that is following the need of
the country as well as coming out of the influence of British.
In the 1980s and 1990s, there was a worldwide trend toward a type of governmental
management called New Public Management (NPM) model that recognise the need for
better accountability, effectiveness, efficiency and transparency. This resulted in public
sector changes. Organisations transitioned away from decentralisation and privatisation to
the development of goal-driven and client-orientated strategies (Nichol & Taylor, 2001). As a
logical consequence of globalisation in the beginning of the reform era in 1999, the
Malaysian government introduced NPM programs, such as performance measurement
reporting, to respond to public demands for productivity, transparency and accountability.
This response to public demand followed trends initiated in developed countries across the
world, where performance measurement has become the core of management reform to
enhance accountability (de Lancer Julnes & Holzer, 2001)
In an attempt to make Malaysias public sector more competitive, Dr. Mahathir
Mohamad, the fourth prime minister who held the post from year 1981 to 2003, came out
with policies such as wearing of name tags by public employee, punch card system, code of
ethics in the public sector, Look to the East concept, work procedure manuals and desk
files, receptionist quality, led by example, telecommunication quality improvements and
more (Mail, 2013). These efforts were continued by the next Prime Minister, Datuk Seri
Abdullah Ahmad Badawi to help reduce corruption by increasing transparency. Yet, till
today, with Dato Seri Najib Razak as Malaysias Prime Minister, Malaysia is still one of the
moderately corrupted countries with Corruption index of 49 in 2012. (Transparency
International, 2013)
Actually, there were tools introduced by the government in managing public funds
better. These tools are like Modified Budget System, Macro Accounting System, Standard
Accounting for Government Agency, Computerised Accounting System. (Mail, 2013)
Procedures and regulations are created, continuously monitored and improved to aid the
usage of them. In the other hand, E-filing is introduced to help tax-payer to pay tax online
which helps in efficiency of tax collection system. Other than that, efforts were seen in the
creation of Multimedia Super Corridor which was established in 1996 aiming to be a global
hub for ICT and multimedia innovation, operation, and services to transform Malaysia into a
knowledge-economy and achieve the developed nation status in the year 2020. (NITC
Malaysia, 2009) This can attract more Foreign Direct Investment (FDI) in our countries and
therefore help our countries in technology advancement.
Although with seen efforts from the government to govern the public sector, there
are internal and external pressures that force the innovation of government in creating value
for the public. (Hood, 2008). With the sweep of online social media, the citizens of Malaysia
are more aware of what they want and their rights as citizens. Events such as Bersih Rally,
Black 505 Rally, the circulation of Sharifah Zohra Jabeen, listen, listen, listen, and more
only means the demand of a transparent, efficient, effective and accountable government is
higher. The citizens are more educated, recognises the inefficiencies that occur in
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government more, and have higher demands as they compare Malaysia with other
countries. The voice of the citizens becomes stronger and stronger as more and more citizen
catch the vision of how great a nation Malaysia can be, when there are no holding back
from the three strongest pillar of blockage of growth which are corruption, racial tension and
religious extremism.
Traditionally, cash basis of accounting is used in Malaysia. Rules and regulations in
the public sector encourages cash basis accounting as it reflects the fundamental principle
that public money is to be spent only on those specified in the annual governmental budget.
Cash receipts, payment and balances is recorded at the time of exchange. Therefore, the
sources and expenditure of cash in the budget is compared with the actual sources and
expenditure that occurred in this cash accounting system (Rauf, et al., 2009). Previously,
Malaysia along with Tanzania were the only non-OECD-members have planned to adopt
accrual accounting for central administrations but failed in their attempt (Tudor & Mutiu,
2006). Basically, accrual accounting is referred to revenue and expenses are recognised and
recorded in the period which they are earned or incurred rather than when cash is paid or
received. To explain further, although there are no movement in cash but there are
recording of the right to receive cash and the legal obligation to pay cash (Rauf, et al.,
2009).
However, the idea of transforming the public sector accounting into accrual
accounting resurfaced whereby Malaysia is aiming to fully implement accrual basis
accounting by year 2015. In June 2011, the National Public Sector Accountants Conference
held in Kuching, also highlighted a new milestone for public sector accounting in Malaysia
whereas the implementation of accrual-based accounting across all levels in the Malaysian
public sector is expected to be completed by year 2015 (Louis, 2011). To be exact, all
reporting entities in Malaysian public sector are expected to produce financial statements
with accrual basis for the first time in the financial year beginning on or after 1 January
2015.
With the transition towards accrual accounting is on the cards, new accounting
policies have been drafted which consist of general accounting policies such as the policies
on assets, liabilities, revenue, expenses and consolidated funds. Those accounting policies
are validated by the Government Accounting Standards Advisory Board (GASAB). On the
other hand, Accountant General Department (AGD), has organized 36 awareness
programmes in order to educate its officers on accrual accounting for government agencies
(Nadiah et al, 2013). In addition, a review has been done on the current process of all
modules in the Government Financial Management and Accounting System (GFMAS) to
enable the design of a new computer software system for accrual accounting (PEMANDU,
2012). The review process is expected to be completed by the end of year 2012.
However, there will be some looseness for those currently reporting under the
modified cash basis of accounting in which the transition will be carried out in two phases.
During the first phase, the accrual basis shall be applied in the recognition of revenue and
expenses which resulting in the recognition of corresponding receivables and payables. The
first phase is due to be finished by year 2014. After the completion of the first phase, the
affected reporting entities are expected to come out with financial statements using the socalled modified accrual basis. The second phase which involve the adoption of accrual-basis
accounting policies for all other assets and liabilities is due to be completed by year 2015. As
a result, all current government accounting standards issued by the Accountant Generals
Department will be replaced by a new set of accrual-based public sector accounting
standards. The new set of public sector accounting standards will be issued by a new
standard-setter known as the Government Accounting Standard Advisory Board (GASAB)
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(Louis, 2011). In future, the accounting standards issued are expected to be in line with the
IPSAS standards.
Recently, Malaysia in its 2014 Budget, also has introduced Outcome-Based Budgeting
(OBB) as a tool to achieve accrual basis accounting (The Malay Mail Online, 2013). This
means Malaysias budgeting system is moving to an outward facing, results-based budgeting
process which requires public sector spending to be aligned behind an approved set of
governmental priorities (KPMG, 2011).This will improve the efficiency of implementation,
reduce redundancy, and evaluate performance of all government projects and programmes.
The Minister of Health, the Ministry of International Trade and Industry and Ministry of
Finance will go through evaluation based on the OBB (The Malay Mail Online, 2013).
2.0 The Nature of Accounting in Public Sector
The public sector plays a role in a few level of government such as a federal, state as well
as local or society to provide basic administration services. Not any of the individuals or
companies has the power to control the public sector because it is part of life in the aspect
of economy and organization that deals with liberation of good and services by and for the
government. Similarly, in Malaysia, the government recognized the needs for public sector
entities to improve their efficiency and effectiveness in the terms of services as well as to
provide better accountability and transparency.
Presently, different accounting basis is used by diverse components of the Malaysian
government. For instance, modified cash basis has been used by both federal and state
government. In the other hand, local government and Islamic Council of Malaysia are using
modified accrual accounting. In fact, only statutory bodies are using accrual accounting
method for the time being. All of these accounting systems are intended to provide more
information to users while in the meantime try to avoid the complexity of accrual accounting
system. The modified cash basis, however, is a fusion method that combines features of
both the cash accounting and accrual accounting system.
Traditionally, cash accounting has been used across the public sector organization.
Basically, the basis of either cash or accrual accounting is a set of rules that determine when
revenues and expenditure or expenses are to be recognized. The cash accounting recognize
transaction and events only when cash has been receive or paid (IFAC 1991). The
recognition of the particular transaction take place independently from the time when goods
and services are ordered, delivered and consumed. In fact, goods and services for which
payment are made such as labour, stores transportation are considered to be consumed
when suppliers are paid. In other words, the cash accounting shown only the volume of
disbursement in which such payment do not disclose the amount of resources used and the
value of actual work done.
According to the cash accounting, the statement of receipt and expenditure is
prepared to disclose information about cash flow during a period and cash balance at the
end of the date period (IFAC 1993). As a result, the financial statement include only three
fundamental items which are cash receipt, cash disbursement and cash balances. The cash
receipt and cash disbursement represent cash inflows and cash outflows respectively, while
the cash balances is the different between cash inflows and cash outflows. Inherent to the
cash accounting, it is not possible to prepare the balance sheet because there are neither
assets nor liabilities in the book. In the other hand, there are no debtors and creditors as
sales are only recognized when there are cash received and purchases are only recognized
when there are cash paid. In addition, there is no closing stock in cash accounting due to
the facts that cash paid to purchases has not been made any adjustment as it does not
concerned with recording usage. Indeed, the cash accounting measured only the financial
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result for a period in terms of difference between cash received and cash disbursed as well
as providing comparison for actual and budgeted expenditure. Therefore, the cash balance
at the reporting date and the users to which those money were applied are used to provide
the sourced of cash received during particular period.
On the other hand, under a modified cash basis, recognition is also associated with
cash flow. Transactions are recognized only when the associated cash flow occurs, with an
exception which the cash flows occurring in the specified period after year end that related
to events that occurred in the reporting period are also recognized. For example, the grant
would be recognized if is paid either during the year or within a specified time period after
the year-end. As the recognition is still associated with the related cash flow, judgments
regarding measurement are usually unnecessary. Elsewhere, under the modified accrual
basis accounting, transactions are recognized when they occurred rather than when cash
being paid. Therefore, on this basis, contribution may be recognized when the eligibility
criteria have been met even though payment may occur in a later period. In conjunction,
expenditures are recognized in a sense that they are recognized in the period the underlying
event occurred. In the modified accrual basis, underlying event is the acquisition of goods
and services or the point when transfer becomes due. Besides, there is no allocation of costs
of non-financial assets to the periods in which they are used. Cost are recognized for nonfinancial assets when they are acquired, even though they will be used to provide goods or
services in the future.
Although accrual accounting has been adopted by the public sector in many
jurisdictions, objections continue to arise regarding its implementation in that setting.
Accrual accounting has been adopted in the government of several countries including
Australia, New Zealand and United Kingdom. Likewise, the Malaysian government has also
taken various accounting initiatives including accrual accounting in an attempt to improve its
financial management procedures. Meanwhile, the International Federation of Accounting
(IFAC) has indicated a project to develop a set of core international public sector
accounting standard (IPSAS), based on accrual accounting and related to International
Accounting Standard (IFAS). From here, it can be seen that the move towards accrual
accounting in the public sector as one of a general acceptance as well as a matter of
commonality of thought.
Basically, in full accrual accounting system, it recognise expenses when the potential
and future economic benefits of a service is consumed or diminished. For example, the costs
of assets that represent future economic benefits of the services are deferred on acquisition
and only allocated to the periods in which they are used. Similarly, the fixed assets would be
depreciated over their estimated useful life. As for the grants, the recognition criteria would
be the same under the modified accrual basis in which the grants would only be recognized
when the eligibility criteria have been met and the amounts can be estimated reliably.
Furthermore, under full accrual accounting, it is more likely that estimates of amounts are
necessary; issues relating to both the probability of the consumption or loss of potential
services or future economic benefits, and the ability to measure that consumption or loss
become relevant. In other words, it must be probable that the consumption or loss of future
economic benefits has occurred in order for an expense to qualify for recognition.
Other than that, accrual accounting highlights the impact of financing decisions on
net asset or equity and may lead public sector entities to be more farsighted when making
financing decision as compare to when relying on cash or cash modified cash reports.
Information on net asset or equity also indicates that public sector entities would be held
accountable for the financial impact of their decisions on either current and future net asset
or equity. Apart from that, changes in an entitys net asset or equity between two reporting
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dates will reflect the increase or decrease in its capital during the particular period under
particular measurement principles adopted and disclosed in the financial statements.
Additionally, the financial statement will include a statement of financial position which
disclosed information about assets and liabilities.
Besides that, accrual accounting also provides information on revenues and expenses
which includes the impact of transaction in which cash has not yet been received or paid. It,
however, is important to note that accurate information on revenues is fundamental for
assessing the impact of taxation and other revenues on the governments fiscal position. It
is because information on revenues would help both users and public sector entities to
assess whether current revenues are sufficient to cover the costs of current programs and
services. Public sector entities, in particular, needs information about expenses in order to
assess their revenue requirements, the sustainability of existing programs and expected cost
for proposed activities and services. As the accrual accounting provides public sector entities
with information on the full cost of their activities, they can thus consider the cost of
particular policy objectives and services. Besides, the accrual accounting provides better
information than cash accounting on the actual cost for particular services delivered by
entities; whether current resources are sufficient to sustain the level of service delivered to
allows public sector assess the most efficient way of producing goods and services as well as
managing the resources over which they have delegated authority.
As for the Malaysia, the Malaysian government try to fully implement the accrual
accounting system within three years time which in the end would affect the accounting
standards and processes for public sector. One of the main reasons Malaysia should make
accrual accounting a success is because of all accounting system need to be computerized.
In order to improve the Computerized Accounting System (CAS) in Malaysian Accountant
General Department, the adoption of accrual accounting is significant in assisting the
government to further understand the behaviour towards the use of existing CAS. The CAS,
nevertheless, will be integrated with accrual accounting system that will further applied in
public sector.
Besides that, recent developments in the Malaysian governmental accounting
bringing about improvements for government in terms of budgeting and financial
management shown a clear willingness of the government to adopt features of new public
financial management. Improving accounting practices and financial management of the
government was seen as one of the agendas in an attempt to strengthen accountability of
the public sector, which can only be achieved by focusing on enhancing the effectiveness in
the management of the governments accounting system through the implementation of
integrated financial management accounting system; improving the process of budgeting
and control; strengthening the implementation of the micro accounting and a standard
computerized accounting system in statutory bodies.
Lastly, the federal government of Malaysia is set to adopt full accrual-based
accounting for financial reporting by 1 January 2015, so as to meet the requirements set by
International Public Sector Accounting Standards (IPSAS). This changes from cash
accounting to accrual accounting will not only allow the public sector to report its financial
performance, financial position and cash flow more accurately, but also lead to a more
accountable and transparent financial management. The shift is vital for Malaysia not only
for a better fiscal discipline and governance, but also will assist government efforts to move
towards a high-income and developed-economy status. Since accrual accounting is regarded
as more transparent and puts demands for good governance, it undeniably would be an
important tool for restoring fiscal discipline and systemic credibility.

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3.0 The Advantages and Disadvantages of Cash Accounting and Accrual

Accounting
3.1 Cash Accounting
3.1.1 The Advantages of Cash Accounting
First and foremost, the primary advantage of cash accounting is it is quick and easy. It will
make account preparation simpler as businesses will not have to make year-end accounting
adjustment whereby usual adjustment for debtors, creditors or stock will be ignored. The
cash basis records only cash transactions, making the cash account as a basic measure of
how well the organization is performing. When payment received from sale of goods or
deposit made, the revenue is recorded as of the date of the receipt of funds. Moreover,
principles underlying the cash basis are easier to be understand and explain.
Secondly, the technical-rational role and the socio-political role of cash accounting
exhibit a significant positive relation (Cohen, Kaimenakis, & Venieris, 2013). This mean that
the use of accounting data for decision making purpose is related to the tendency of the
elected management to use the data in order to influence the attitudes of a given
municipalitys both external and internal stakeholders.
Third, the cash accounting was initially considered more appropriate for public sector
due to the facts that its emphasis on compliance with rules and regulations. In other word, it
not only makes little or no reference to the liabilities that an organization will be required to
meet in the future, but also does not recognise the benefits or revenue that will be obtained
from purchased assets over a period of time. That is why most countries still using cash
accounting to produce periodical balance sheet information.
Last but not least, the cash accounting need no specialized accounting training. For
information, cash accounting involved the separation of funds received, authorization
according to set hierarchical responsibilities, and accuracy in the recording and reporting of
movements in and out of these funds. These tasks, however, do not required specialized
accounting training but simply an understanding of basic record keeping. The system was
fairly unsophisticated and tend to focus more on internal reporting requirements.
3.1.2 The Disadvantages of Cash Accounting
One of the disadvantages of cash accounting is it has been poor in term of matching
principle. While the cash accounting is good in tracking cash flow, it is totally different when
it comes to match the revenues earned with money laid out for expenses. Matching
principle, however, is defined as expenses recognition is realized either because the expense
relates directly to the earning of revenue or because the expenses relates directly to the
earning of revenue is incurred. The application of matching principle result in deferral of
prepaid expenses in order to match with revenue earned in the future. This is important in
order to provide proper information on the financial performance and position of an
organization entity. Therefore, a simple cash account will not give a true picture of an

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organization performance. For example, banks might require accounts to be prepared under
Generally Accepted Accounting Principles (GAAP) in order to offer credit and loans.
Secondly, no attempt has been made to match expense with the revenue it
generates. This means that the income statement and balance sheet may not be a good
indicators in reflecting recent activity and present activity conditions. Cash-based accounting
can distort the true operations of the activity and incorrectly reflect income whereas the
accrual based accounting, transactions are counted when the order is made, the item is
delivered or the services occur, regardless of when the money is actually received or paid.
Income is counted when the sale occurred and expenses are counted when there are
received of goods or service (Tudor & Mutiu, 2006).
3.2 Accrual Accounting
3.2.1 The Advantages of Accrual Accounting
First of all, accrual provide a better picture of financial performance. In fact, accrual
accounting easily allows the business to evaluate or predicted whether the company is
profitable as well as knowing the transaction of profit and expenses where it is coming from
and going. It is in line with the matching principle approach in which revenues are matched
with expenses incurred to produce the revenues. In contrary, under the cash accounting,
the account payables or receivables are not accounted for until the money actually went in
or out of the company which might produce an inaccurate financial picture of a company.
Other than that, accrual accounting require more bookkeeping than cash accounting method
where unearned or liability account must be created to account for advance payments
receive from customers until the revenue is earned. According to Sutcliffe (2001), accrual
basis of accounting provide better quality of financial information which is necessary for the
discharge of accountability and better decision making especially in internal management.
Secondly, accrual accounting lead to more accountability and more efficient control.
Many have argued that accrual based financial accounting seem to have more information
needed for decision making than cash based accounting. It have a greater focus on outputs
rather than just on the inputs. The information available from accrual based account
facilitates a better quality of management and decision making including in the case of the
allocation of resources. Reporting on an accrual basis accounting not only shows how a
government has financed its activities and met its cash requirements, but also facilitate
users to evaluate governments on-going ability to finance its activities and to meet its
liabilities and commitments.
Third, accrual accounting provide better performance compatibility managerial and
financial efficiency. Accrual based accounting provides greater comparability of management
performance results which are not affected by the timing of cash payments and receipts
which includes information about fixed and current for both assets and liabilities. Basically,
the cost of capital assets are spread over the useful life of the assets. In conjunction, the
management of capital assets is encouraged as the accounts include asset values and it
provide a more effective and reliable assessment of the financial health of the organisation
as well as the sustainability of government policy. This show that accrual basis accounting
provides a government with the opportunity to demonstrate successful management of its
resources. Indeed, it is useful in evaluating a governments performance in terms of its
service costs, efficiency and accomplishments.
Last but not least, accrual accounting is significant in reporting and budgeting.
Accrual accounting objective which is more towards to provide understandable, relevant,
reliable and comparable information is useful to a wide range of user in making economic
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decisions. Financial reports have to rely on the budget and show differences between the
actual results and the budgeted figures as well as any changes during the term which
leading to better cash management and assisting in preparation of more accurate cash
budgets.
3.2.2 The Disadvantages of Accrual Accounting
Basically, the primary disadvantage of accrual accounting is the need of improved
computerized accounting and experienced staffs. To apply accrual accounting and issue
accrual accounting financial statements, a need for skilled, experienced accountants and
familiar with the business will become more intense. The need for achieving effectiveness,
efficiency and economy goals while improving accountability and transparency in public
financials are expected to upgrade the role of accrual accounting in municipalities which
mean that the accrual accounting is expected to be more aggressive pertaining to the roles
of accounting rather than in cash accounting. Besides, the preparation of discharges for
government grant purpose will become more complex and require a more highly developed
accounting skill set. Likewise, the organization such as public sector need for an improved
computerized accounting system.
Secondly, there would be increase administrative burden under the accrual
accounting system. In order to provide efficiency financial statement, it is important to
establish a proper accounting systems which includes the purchase of computer systems
and pilot testing of these systems. This will caused the system to be more complicated in
nature. Without experienced or skilled staffs and effective accounting computer systems, it
will lead to the possibility of government accounting being brought into disrespect if accrual
accounting failed. There is also possibility in which the international accounting standards
could be applied with no real understanding of the issues involved due to the facts that they
are principles-based standards.
Third, the disadvantage of accrual accounting is the difficulties in developing
accounting policies. When shifting towards accrual accounting, there will be gaps in the
standards if the standards not being continually updated and relevant. Moreover, the
external auditor might be unable to prevent politically-based amendments for particular
accounts if the decision on accounting treatment regarding the particular account has been
made on political grounds. As a result, the process of financial management and
expenditure control become even difficult for members of Parliament and members of
Parliament, the government, staff of the ministry of finance, other ministries and the
external auditors.
Finally, the disadvantage is the exposure to risks associated with the budgeting
process. Budget often seen as a key document in the public sector. It comprised of the
allocation of resources between public and private sectors in order to determine the fiscal
policy, distribution of the taxation burden and may also provide the legal authority for
expenditure. While the budget remain framed on a cash basis and the account maintained
on an accrual basis, this could make the process of financial management and expenditure
control much more difficult if there are no systematic adjustments have been made.
4.0 The Reasons behind the Transformation from Cash Accounting System to
Accrual Accounting System in Public Sector
In line of public development, there are many countries have go on with their own
transformation in the public accounting system which is from cash to accrual accounting
system. Likewise, Malaysia is also in the process of full adopt the accrual accounting system

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in its public sector. However, there should be reasons behind those transformation that was
carried out throughout the world. Hence, those reasons would be discussed further below.
First and foremost, the main reason of transforming the accounting system into
accrual system is none other than to provide superior accountability as well as transparency
of financial statements and therefore improve decision making. According to Geoffrey
Thinker, accrual accounting can provide more relevant, reliable, comparable and useful
information of financial statement for user or to government. With the accrual accounting
system, the accountability and transparency of government financial would be more reliable
through proper information prepared in the financial statements.
Secondly, it is to give true reflection and the real time position of government
financial affairs. This is due to the facts that there are deficiencies of cash accounting
system during the incurred and reporting of both revenue and expenses. In cash accounting
system, the transaction of revenue will recognized and recorded only when the cash was
received instead of during the particular transaction has been incurred. Unlike accrual
accounting system, the transaction seem to be properly recognized as the revenue will be
recorded when it was earned and expense will be recorded when it was incurred. This is
vital for government in producing useful information for financial purposes and decision
making especially in terms of budgeting.
Elsewhere, a lot of governments that have changed to accrual accounting have
mentioned to make the true cost of government more transparent as one of their key
reasons. By referring to MIA magazine on August 2011, this reason has been put as one of
the key objectives of why government need to change the accounting system to a new one.
This, however, can be seen in the cost of pension that government provided to employees.
The right or correctly to contribute and calculate the cost of pension during the cash
accounting is rather a confusing matter itself and thus caused the existence of unrelated
expenditure. For example, in loan or borrowing coat, it can lead to an outstanding debt
since the government will pay interest by lump sum at the end in cash accounting. By
transforming by using the accrual accounting system, government can instead make a true
cost of financial without eliminate it and it can determined the full cost of government
activities as what have been stated by Abdul Khan and Stephen Mayes.
Fourth, government or public sector choose to transform the accounting system is
because of accrual accounting tend to be more reliable than the present system
implemented. They are to be believed that accrual accounting is more reliable in measuring
financial performance and mitigate the challenges of sovereign accountability and risk
management. According to Datuk Wan Selamah, the Accountant General in speaking of
National Public Sector Accountants Conferences 2011 (NAPSAC), stated that migration to
accrual accounting will be seen as an important step for Malaysian public sector finance
practice to be in line with those implemented in developed countries. This is because, by
adopting and using accrual accounting system, the economic events will be recognized when
it occurred rather than only when payments was received that was practiced in cash
accounting system.
Fifth, the reason of transforming accounting system in public sector is accrual
accounting will present a more systematic approach in public financial performance. In other
words, government would use systematic approach in identifying, keeping track of, and
valuing of asset and liabilities. According to Dato Sri Michael (2011), the present accounting
system cannot properly track the certain assets after purchased and in the meantime is not
generally added to the cost of production of goods and services provided to public. This will
affect to government financial performance in produce reliable yet useful information for
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users whereas government are not fully able to get the real picture on how much cost of
goods and services have been incurred.
Last but not least, Abdul Khan and Stephen Mayes (2009), said that the
transformation of accounting system in public sector is due to the facts that accrual
accounting system will help in promoting changed behaviour for decision maker in budgeting
as well as to reform the target in future. They believed that accrual accounting system
created an objective to provide an under stable, relevant and reliable yet useful information
for decision making which in the end lead to a more better and effective economy.
Nonetheless, it is important to note that financial budget is one of the important elements
for a successful transformation in which the results from budget shown many variances
between actual and expected figures. Hence, it is significant for the public sector to be able
to make a relevant budgeting (Bunea-Bontas & Petre, 2009).
5.0 The Challenges in Transforming Cash Accounting to Accrual Accounting in
Public Sector
Like any other reform, the implementation of accrual accounting in the public sector is not
an exception and will have various challenges on its own. Challenges are inevitable
whenever change is needed, however, Malaysia can learn from best practices and lessons
from frontrunners who have adopted International Public Sector Accounting Standard
(IPSAS) such as Australia and New Zealand. Accrual accounting, though, is more complex in
nature and required greater use of judgement than cash accounting and hence its adoption
required new systems and considerable timing for a successful implementation. For
example, New Zealand took ten years to change into accrual accounting.
Generally, public entities face four major obstacles in adopting accrual accounting
when they try to adopt accrual accounting for the first time (Gomes, 2013). First and
foremost, the challenge is related to strategic management issues. These includes
establishing project teams early, focusing on education and communications, preparing
business impacts analysis and establishing the right legal and regulatory framework. Global
aid agency such as United Nations Development Programme (UNDP) have to be adopt by
IPSAS to facilitate their mission. Basically, IPSAS primary purpose is intended to improve
public sector accountability and reporting. Though the collaboration, UNDP will set up a
financial shared services centre in Malaysia. This is to ensure the transparency and accuracy
of information. There is also a need for comparability for the accounts of others agencies
within the organizations own different divisions. Meaning to say, management should
analyse all the costs-benefits of the economic and social. Apart from that, performance is
unlikely to be optimized if there is no corresponding change to the way in which
management and administrative practices are applied. Therefore, it is important to achieve
behavioural change on the part of public sector managers to find better ways to achieve
outcomes.
The second challenge towards transformation to accrual accounting is policy settings.
Changing the way in which revenue, expenses, assets and liabilities are recorded and
reported will not simply by itself bring about the desired improvements in public
administration. Instead, Malaysia need to comply with international standards for public
sector financial reporting which includes the reporting of all assets and liabilities.
Additionally, they also need to evaluate countries compliance with fiscal transparency
standard. For instance, Malaysia can use auditing and assurance as a means for assessing
compliance with standards. In conjunction, a much broader set of goals and incentives are
required to achieve these ideals. Changing the way in which public services are managed
and administered will be necessary to bring about improvements. As we know, to change
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the policy setting in a country is not an easy task and required substantial amount of
consideration and time. The adjustments will not only affect the financial statement itself
like the recognition of assets and liabilities, but also required the exercise of professional
judgement with the transition as the scope for interpretation and judgement regarding the
recognition, measurement, presentation and disclosure is more extensive in accrual
accounting. This would, in the end, pose a heavier burden on Public Sector Accountants.
Third, the challenge is regarding to the resources requirement issues. It refer to the
staff competencies and technologies used in Malaysia for the purpose of accrual accounting
implementation. During accrual accounting implementation, staff competencies will have to
be reviewed and upgraded in public sector agencies. To make sure the improvement of staff
competencies, retraining will be necessary to guide them in exploring as well as to
understand the accrual accounting system. For example, the implementation of e-learning
within the public sector agencies should be done to ensure a better communication and
learning. Alongside with the accrual implementation, the demand for specialized skills will
substantially increase. It would incurred a substantial amount of cost due to the
technologies provided for the staff training program. In fact, people need more training to
understand accrual accounting as compared to cash accounting. Yet, once the
understanding towards accrual accounting has been established, accrual accounting is
undeniably more informative than cash accounting.
Next, the challenge is about communication. Communication plans and protocols
have to be developed within agencies with staff and contracted consultants, between
agencies and central agencies such as the Accountant Generals Department with
government and parliament, the media and the community. Without a good and effective
communication among them, the plan of transforming cash accounting to accrual accounting
can be seen as no more than merely a talk. In terms of staff and contracted consultants,
they required good communication to facilitate the effectiveness of the training programme.
In the other hand, a good communication should be established between government and
community. In other words, the government should consider the public response towards
the transformation to accrual accounting. Moreover, the government should be transparent
in term of benefits and consequences for the transformation.
On the hand, political issues is another challenge to be considered. It is
unquestionably that politic play dominant roles in most of the countries and thus will play its
part in most countries who adopting accrual-based accounting. Malaysia is also not
exception for this. As we know, government hold the governing power in most of the
countries and hence has the authority to make a decision on the transition. To make a
successful transformation, politics is an essential element that cannot be overlooked and
discounted. While having a set of high quality of accrual accounting standards in place is
crucial to ensure usefulness and transparency of information, sometimes it can be an issue
when conflicting with political desire.
Furthermore, the completeness of asset and liability registered in all entities also one
of the key challenge in Malaysia. It is because accrual accounting is more difficult and
complex than cash accounting. The issue arise when accrual accounting required
accountants to consider the value of assets regardless of building, equipment or exhibits in a
museum. While the private sector might be easier to evaluate the value of an asset, it is not
the same in public sector as the different nature exist between public goods and private
goods. It is no longer sufficient to know only the costs of items, but instead accountants
need to assess how the value is used based on its future economic benefit or service
potential.

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Besides that, other issue associated with the transition to accrual is related to cash
information in an accrual framework. Moving to an accrual basis of accounting does not
mean to eliminate completely the cash accounting. In contrast, cash management is an
integral element of an accrual-based financial management framework. In fact, IPSAS and
Government Finance Statistics Manual (GPSM 2001) both require the production of a full
statement of cash flows that separately identify cash receipts and payments associated with
operating, investing and financing activities. It is to be believed that modern accrual-based
systems have functionalities to support cash-based accounting and reporting. The task of
configuring modern system to provide macro-cash accounting and reporting data is pretty
simple. Yet, if the government wishes to retain the capacity to track and evaluate entities,
programs, functions, products and cost elements on a detailed cash-transaction basis, it is
still possible but required more complex attendant system configuration and ongoing
maintenance tasks.
Aside from that, there are still some gaps in the international public sector
accounting standards governing the accrual-based recognition and measurement of financial
transactions, events, and balances. Some of the significant existing gaps includes nonexchange revenue such as taxes and transfers recognition, accounting for social policies of
government, heritage assets, and Private-Public Partnership (PPP). At the moment,
governments would need to formulate their own interim standards or guidelines in those
areas while waiting the relevant international standards to be finalized.
Other than that, the government also face the dilemma in choosing the right system
and procedure for the accrual accounting implementation. Regardless of whether the
government adopts a centralized of decentralized model, it is an important element to be
considered for the purposes of generating consolidated financial statements for the general
government sector or public sector. This is none other than to enable the elimination of all
inter-agency transactions and balances, while the sector are separately identified in the
entities accounts. While eliminations of flows are required to produce good quality cashbased consolidated reports, an accrual-based framework also required elimination of stocks.
Further, system and procedures have to be designed to ensure that eliminations of flows
and stocks are equal and opposite within an integrated double-entry accounting system.
Special systems and procedures might be necessary to efficiently and routinely eliminate a
large volume of inter-entity transaction within and between public sector entities.
Last but not least, some commentators have argued that without a change in a
budgeting regime, a modest move to accrual accounting would fail to trigger the necessary
change in culture and incentives. As a result, the benefits would be limited. However,
government may decide to adopt accrual accounting as a first step before embarking on the
more complex task of introducing accrual budgeting. This may give rise to a temporary
inconsistency between ex ante and ex post information. As there will be timing differences
in the introduction of accrual accounting and budgeting, the need to maintain the capacity
to generate suitable cash-based reports in the interim is particularly important. Additionally,
government might also decide to introduce accrual-based appropriations to align spending
authorization with budget and actual. This, nonetheless, is to reflect among other things,
the constitutional and legal requirements of individual jurisdictions since government have
adopted different approaches in those areas.
6.0 The Impacts of the Adoption of Accrual Accounting in Public Sector
First of all, the effect of the adoption of accrual accounting can be seen through the
information provided. With accrual accounting, it provides information about financial
position and performance relevant to the management of public resources which are not
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provided in cash accounting. The information about financial position such as the stock of
wealth, performance or change in the stock of wealth is significant for better judgments to
be made about efficiency and effectiveness of economy, value for money, and in the use of
public resources (Rowles, 2004).
Secondly, in terms of reporting and budgeting, the objective of accrual reporting is
different compared to cash accounting in which its aim to provide understandable, relevant,
reliable and comparable information, as well as useful for wide range of users in making
economic decisions (Bunea-Bontas & Petre, 2009). In fact, accrual accounting comprise of
non-cash information such as revaluations, write-offs and consumption of assets through
depreciation. In addition, there is a need for a new chart of accounts to be designed to meet
the new standard of reporting. As for the budgeting, financial reports have to rely on the
budget in showing the variances between the expected and actual figures during particular
term. The impacts of accrual accounting, however, can be seen through the accrual
budgeting shown below.

Accrual Budgeting
I.

First of all, accrual budgeting will provide improved cost information to

decision makers and improved discipline for budget execution purposes
(Blndal, 2004). With accrual budgeting, decisions will be based upon the
total cost of producing outcomes and outputs instead of only the immediate
cash outlay. Additionally, budget execution must also take note to the costs
being deferred as well as more constrained from undertaking activity that its
cash impact will affect subsequent reporting periods.

II.

Secondly, the accruals will direct the focus towards improving capital stock
management (Blndal, 2004). This is due to the facts that accruals provides
better incentives for management and disposal of assets as well as better
incentives in planning investments. In addition, it also provides new
motivation in managing capital such as debtors, creditors and stocks.

III.

Thirdly, accrual budgeting can eliminate biases perceived to exist in which the
recording of capital investments has been viewed as a lump sum instead of
being capitalised and depreciated over its useful life (Blndal, 2004). In fact,
capital spending is to be believed that being neglected in the traditional cashbudget framework which often lead to unsatisfactory state of infrastructure
and other capital assets. The issue arose when an asset which actually has a
useful life, but its total acquisition cost being treated as single item in one
years budget rather than capitalised and distributed over its useful life.

IV.

Fourth, the adoption of accrual budgeting can be a catalyst for other

management reforms to be made in public sector (Blndal, 2004). To be
honest, the introduction of accrual budgeting cannot be seen as separate
item in the public sector. This can be seen from the countries that have
adopted accrual budgeting whereas accrual budgeting have contributed to a
wider management reforms in their public sector. Indeed, the accrual
budgeting was a key device in changing people behaviours and to foster
culture change for particular government.

V.

Last but not least, accrual budgeting can light up the long-term sustainability
of public finances (Blndal, 2004). This can be done though the highlights of
the long-term consequences of current decisions. It is, however, derived

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through the incorporation of a balance sheet in the accrual budgeting

framework that consists of government's assets and liabilities.
Third, there will be adoption of current public accounting standards such as
International Public Sector Accounting Standards (IPSAS). With the transition towards
accrual accounting, government will have no choice but to adopt the international public
accounting standards for them to be aligned with the global movement. However, the way
accounting standards might be applied in particular government can be difference and could
lead to potential risks that might reduce the validity of the financial reports produced. For
instance, IPSAS might be applied without any real understanding or the general accounting
principles in IPSAS are not properly addressed (Bunea-Bontas & Petre, 2009).
Fourth, the impact can be seen through the financial performance. The accrual
accounting not only provides information on revenues and expenses, but also the impact of
transactions in which the cash has neither been paid nor received. The knowledge on
revenues is vital in assessing the impact of taxation on the governments fiscal position and
the need for borrowing in long run. In the other hand, the knowledge on expenses is
essential in assessing revenue requirements, the probable cost of proposed activities and
services as well as the sustainability of current programs. Moreover, the income statement
prepared in accrual accounting helps government to focus on management by results and
management of resources. As a result, performance measurement is more reliable when full
costs for a period are taken into account.
Fifth, the governance and accountability within the public sector would be enhanced
through the adoption of accrual accounting (McPhee, 2006). Accrual accounting is to be
believed that would provide the foundation for the additional flexibility provided to public
sector managers. In the meantime, accrual accounting also enhance the accountability in
public sector by extending the notion of performance beyond the use and application of
cash. In terms of governance purposes, accrual accounting help to strengthen the objectives
for a more competitive approach in public sector provision whereas it facilitate more efficient
and effective resource management. Furthermore, accrual accounting help to provide a
longer term focus on the effect of government and management decision.
7.0 Other Countries Experiences in Accrual Accounting
During the last two decades, the transition from the cash accounting into accrual accounting
has been a trend in the public sector in many countries. The trend, thus, has shown that
accrual accounting not only has found it admirers from the private sector, but also has
started to grow substantially as one of the favourite in public sector as well. Therefore, at
here, we would like to address some of the countries that have adopted accrual accounting
in their public sector to have an insight view how each of the stated countries experiences
from the adoption of so called accrual accounting system. Although the accrual accounting
have lay the basic principles theoretically, there can be seen many differences in terms of
practicality and implementation. Hence, the countries discussed here would give us a brief
understanding towards the accrual accounting system in which different countries would
have different design of accrual accounting system in their public sector as well as the
implementation process. It is important to note that the inclusion of Australia and New
Zealand is due to the facts that they are among the early pace-setters in accrual accounting
reforms in public sector, while the Romania and Netherlands are included due to their
uniqueness approaches and experiences of accrual accounting in their public sector.
7.1 Australia

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In general, the adoption of accrual accounting for the public sector in Australia is
somehow similar to New Zealand as it occurred during a period of broad economic reforms.
The Australias reforms, however, not as aggressive as what can be seen from those of New
Zealand. A comprehensive reforms were implemented through two initiatives which are the
Financial Management Improvement Program and the Program Management and Budgeting
due to the pressure arose during early 1990s. Likewise, a government management system
was introduced with the emphasis on performance assessments through the Financial
Management and Accountability Act of 1997. Soon afterwards, the government agencies are
required to use accrual basis in terms of budgeting, reporting, and accounting. In its 19992000 budget, the Australia has first produced its comprehensive accrual-based financial
statements along with the fully implemented accrual output budgeting. Australia has
continued to expand its accrual-based accounting and budgeting ever since. (Champoux,
2006)
The Australia, again, look alike to the New Zealand in which it has shown reinforced
fiscal discipline in recent years. With the reinforced fiscal discipline, Australia not only
managed to produce a surplus budget in every year for almost a decade, but also succeeded
to reduce its net debt to near debt elimination. Other than that, its gross financial liabilities
which is 15% in year 2005, has been the second lowest among the Organization for
Economic and Co-operation and Development (OECD) countries. Simultaneously, Australia
has enjoyed a steady economic growth in real GDP by averaging 3.6% annually over the
past decade. Still, the question arose again whether the accrual accounting reforms are the
major contributor to both the fiscal discipline and economic growth as well as to what extent
has the accrual accounting reforms benefited the Australian. (Champoux, 2006)
7.2 New Zealand
Essentially, the adoption of accrual accounting in New Zealand has took place during the
economic reforms which is to transform the countrys economy from being one of the most
centrally controlled in the non-communist world to a very open economy. Those reforms,
though, has a span of only a few years. It first began in the mid-1980s with the widespread
of privatization and corporatization of government-owned commercial entities. In addition,
there is a broad deregulation of its currency and financial markets. Not long after, the
government began to adopt modern management practices in order to increase
performance and accountability in its remaining public commercial entities. (Champoux,
2006)
In term of budgeting, the New Zealands budgeting process has been based upon a
cash accounting system till year 1989. Yet, New Zealand has redefined the governments
budget process by making an output-based budgeting1 in under the passage of the Public
Finance Act of 1989. Under the Public Finance Act of 1989, all budgeting and reporting at
the department level also required to use accrual methods. Intrinsically, the departments
must use accrual-based projections and reports in order for the Parliament to compare costs
with private suppliers whenever possible. Moreover, the Public Finance Act also implemented
accrual-based performance assessments. In year 1992, New Zealand managed to come out
with its first fully accrual-based combined financial statements which is also known as the
Crown financial statements. By nature, these statements are very much similar to the GAAPcompliance reports of large corporations and it is audited independently. Not long
afterwards, the Fiscal Responsibility Act has expanded the accrual system even wider in year
1

An output-based budgeting process, emphasizes the use of output (product) cost information as a
managerial tool and more specifically as the basis for a purchaser/provider (quasi-market) model of
budgeting. (Guthrie & Carlin, 2000)

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1994 whereas the government is required to articulate its fiscal strategy and report progress
towards its objectives on an accrual basis. Subsequently, accrual accounting has been the
principle system for both budgeting and financial reporting. In the meantime, it also has
continued to be utilized as a performance measure for government entities. (Champoux,
2006)
In overall, the accrual-based reforms in New Zealand undeniably can be seen as if
not, the most comprehensive that any country has undertook to date. Nevertheless, it is still
hard to determine the true fiscal and economic impact of the reforms despite the
significance impact from the reforms towards government management processes. Most
observers, in general, seem to agree that the accrual measures have brought many benefits
such as better information for the purpose of asset management, cost calculations and a
much greater fiscal discipline. In fact, New Zealand has shown strong fiscal restraint since
the implementation of the reforms. Even so, New Zealands gross financial liabilities has
decreased dramatically from 65% of GDP in 1993 to 23% in 2005 along with the reported
budget surplus in nearly every year since early 1990s. In the meantime, New Zealand has
enjoyed a moderate to strong economic growth by averaging around 3.3% annual growth in
real GDP and has its net debt drop significantly from approximately 52% of GDP in 1992 to
near 10% in 2005. While all the statistics are showing positive and encouraging
performances from the New Zealand reforms, it is highly uncertain for many to what extent
the economic success can be attributed to the major reforms and, more specifically, the use
of accrual accounting.
7.3 Romania
Basically, the development of public sector accounting in Romania was initiated back in year
2002. In year 2005, the development has been enlarged through all the public sector
entities, but the transition can be seen as a static process even though there are many
unresolved issues. In fact, the introduction of accrual accounting in the Romanian public
sector has been viewed as a requirement of adhering to European Union (EU) rather than as
a necessity or an improvement (Pitulice, 2013).
In term of political spectrum, the accrual accounting as a whole has not disseminate
its principles and advantages too much to the Romanian political spectrum as the budgeting
is still performed on a cash basis. In addition, the political spectrum was involved in the
adoption of accrual accounting only as the supplier of Government members due to the facts
that the Government is typically formed of politicians from the party holding the majority of
votes in Parliament for a certain period of time. In conjunction, the accrual accounting for
public sector entities was introduced through Order of Ministries of Finance in year 2002 and
2005 respectively instead of by laws that must be approved by the Legislative power which
is the Parliament. Nonetheless, the interest for accrual implementation in public sector
entities was quite low as it is only a step taken by the Romanian Government to harmonise
its regulations with the EU regulations, to finally become a member state of EU (Pitulice,
2013).
As for the accounting standards setting for the public sector, the role is an exclusive
privilege of the Ministry of Public Finance without the involvement of the accounting
profession which represented by The Body
of Licensed Accountants and Experts
Accountants in Romania (CECCAR). Indeed, CECCAR was never been involved in either the
application or monitoring process of accrual accounting implementation in the public sector.
According to Hepworth (2003), it is to be believed that the setting of accounting standards
by the Ministry of Public Finance on its own can be seen as to apply the standards
developed in a way that suited the political circumstances of the moment. As a result, the
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process lacked its credibility as there is absent of critical appraisal from the accounting
profession on the process of adoption of accrual accounting.
In the other hand, the preparation of financial statements is subject to internal audits
and not required to be performed annually. The national Court of Accounts performs an
external audit to verify the financial statements prepared. Yet, the audits performed by the
Court of Accounts are not necessarily performed on an annual basis, but every two to three
years. The external audit, however, focus mainly with legality of expenses and respecting
the legal procedures instead of the judgements made for asset valuations, materiality and
prudence. Moreover, internal auditors in public sector entities are not mandated to be
members of the statutory audit professional organism such as the Romanian Chamber of
Financial Auditors (CAFR) in which most of them are actually are not the members. In the
other hand, the external auditors of the Court of Accounts also not required to be members
of either CECCAR or the CAFR. Thus, it lead to people start to wonder how pertinent the
opinions expressed by both the internal and external auditors from accrual accounting
objectives perspective.
Apart from that, an independent audit is not seen as compulsory for public sector
institutions regardless of their level of hierarchy. Thus, the public sector entities are not
subject to make their financial statements or internal audit reports available publicly. The
absence of independent auditor has been viewed as missing piece towards the reliability of
the financial statements prepared. Although, the CAFR is involved in auditing public sector
entities for reports on projects, some of the audit reports have scope only to the project
itself rather than the entity activity as a whole.
Besides that, the training sessions were designed for the accountants rather than the
managers when the Romanian Government implemented accrual accounting. This focus has
led to little understanding from management towards accrual accounting and the possibility
of using information derived from the accrual financial statements that might lead to
efficiency and effectiveness of the entitys itself. According to Pitulice (2013), the perception
accounting is an accountant job was still exist among the management as they are not yet
held responsible for the results of the entity. In fact, they are not even educated to
understand what the benefits that can be derived from the accrual accounting in public
sector entities.
In overall, the implementation of accrual accounting in Romania still far from reaping
it full benefits as the existence of many unresolved issues such as the size of state, the
needs of lowering the bureaucracy in public management as well as the needs of more
involvement from private sector and Non-Government Organization (NGO) in public sector.
Although the existence of many unresolved issues, the government authorities
acknowledges there are many room for improvements. For that reason, it is to be believed
that the accrual accounting in Romania undeniably will enter the right path and its
objectives will soon be fulfilled.
7.4 Netherlands
Generally, strengthening accountability in public sector has a long history in the Netherlands
(Hoek, 1994). The process of reinforcing accountability in the central government sector has
long set in motion since the mid-1980s. The Dutch government even has developed major
reform plans due to the pressure from the Parliament. One of the notable reform plans is an
integrated commitment-cash accounting system. However, further reforms were developed
in the early 1990s which includes accrual accounting. Apparently, the Dutch government
started to value the experiences of the agencies. In fact, the government has announced
the introduction of accrual accounting system in the entire central government sector in its
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Budget Memorandum 2001. As a start, the central government decided to adopt the 1995
European System of Accounts (ESA) as the standards for government accounting.
Although the Dutch government has adopted ESA as the leading standards for
national accounting, it raised many questions as the International Public Sector Accounting
Standards (IPSAS) is view by most as the leading standards for government accounting.
Indeed, the Dutch governments intention to apply ESA in its budgets and financial reports
seems exceptional from international perspective in which it implies that the contents of
these documents will fail to meet current requirements. Examples of the noncurrent
requirements includes the heading of items in the reviews, the criteria for capitalization, the
non-allowance of provisions as well as the grouping of main financial reviews. (Hoek, 2005)
In terms of budgeting and accounting in the Dutch central government, they actually
mainly uses a mixed cash or commitments system. In order to gain the status of agency,
the central government have to apply an accrual accounting system. Even though
accounting on accrual basis did have its own additional merits, the political and economic
conditions in Netherlands did not permit a comprehensive move towards new accounting
system. For instances, the standardization of public spending on the costs basis implies the
variation of cash expenditure. In addition, in the case of investments, the costs might not
necessarily equal to the cash spending. While a cash-based system recognizes investment
on the date of spending, an accrual-based system spreads the costs of investments over
time. In year 1999, the introduction of policy accounting was announced by the Dutch
government and the process is referred to VBTB after the documents acronym in Dutch.
Soon, the government made an accrual accounting system possible effective from year 2001
and only conditionally for other central government organizations. Consequently, there are
two different accounting systems exist in the public sector in which the central government
still applied a cash or commitment system. The existence of two different accounting
systems was confusing and, hence, been criticized widely.
Yet, in 2000, the Dutch government has taken a proactive approach by the
announcement of accrual-based accounting system to be implemented in the whole central
government sector within several years ahead. This is viewed as significant step forward to
a more result-oriented government in which the policy budget links means, instruments and
performance. This step, however, did not go as smooth as it would have been expected as
the Dutch finance minister announced a reconsideration of the governments development
plan regarding the budgeting and accounting system in year 2003 and prefer only partial
implementation of accrual accounting system. In fact, the government has decided to
implement accrual system on a case-by-case basis through the expansion of its agencies
with the expectations of there will be approximately 80-85 percent of central government
employees will work for agencies. (Hoek, 2005)
Despite all of the arguments and discussions regarding the implementation of accrual
accounting system in government sector, the accrual-based budgeting and accounting
systems has actually found its feet and widely used in the Netherlands. While it is being
implemented, it is actually been used for a long time by the local, provincial and singlepurpose governments. The government, though, aim to accomplish this process by year
2006. Although some positive progress has been made, it seems impossible for the goal to
be achieved in year 2006. Presently, departmental budgets still provide inadequate insight
into policy effects whereas the relationship between means, expenditures and goals as well
as the performance is not clear enough. This, nonetheless, is due to the facts that policy
objectives are not yet formulated in a measurable manner in terms of target figure and
effect indicators. (Hoek, 2005) Hence, it is not possible to see the Dutch to successfully

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implement accrual system into its government sector as the ideas are there and issues have
been identified.
8.0 The Rationale for Accrual Accounting: A Case of Malaysian Public Sector
In Malaysia, the transition from cash accounting to accrual accounting can be traced back in
year 2011 when the Malaysian government took the challenge to transform its cash
accounting into accrual accounting. The use of accrual accounting has been seen as an
attempt by the Malaysian government to improve the financial management procedures in
Malaysia. In the other hand, Wynne (2004), seen the transformation towards accrual
accounting is part of the process of adopting the style of financial statements practised by
private sector companies into the public sector. Following the decision made by the
Malaysian government, the Accounting Project Team of Accountant Generals Department
(AGD) has been assigned to carry out the transition and implementation of accrual
accounting in Malaysia public sector. The transition, though, expected to be completed in
five years time (AGD, 2011). Since then, many initiatives and programs have been
established to reach the full implementation of accrual accounting. The rationale behind the
transformation, however, has many other reasons that would be discussed further in the
following paragraphs.
First of all, one of the main rationale that driven the transformation into accrual
accounting is none other than to have more effective and efficient fiscal management
(Irvine, 2011). With accrual accounting, the financial information generated would be more
reliable and better in terms of accountability, decision making and improved transparency.
Moreover, the traditional cash accounting method is perceived as no longer relevant in many
countries around the world. Other positive impact of accrual accounting includes the
empowerment of controlling officers to be financially responsible, the efficient allocation of
resources by the value for money (VFM) concept and performance audits in relation to the
results framework of the outcome-based budgeting (Irvine, 2011). This, nevertheless, will
produce an effective management and made it possible to assess the effectiveness each
agency.
Secondly, it is due to the facts that accrual accounting is convenient to users.
According to Rowles, the convenient to users is one of the rationales for accrual accounting
implementation (2004). With the implementation of accrual accounting, the Malaysian
government would be able to improve governance, have better control over its assets,
increase the confidence of all stakeholders, and most importantly provide more accurate
information from decision-making process with all stakeholders (Nadiah et al, 2013). As a
result of a more authentic and accurate information on the government position, the flow of
economic resources and economic performance is more efficient and effective. In fact, the
aspect of convenience to user also implied on how accrual accounting facilitate the work of
an account.
Thirdly, the aspect of cost and financial statements which relied on an accountants
point of view and own judgement also have motivate the transformation towards accrual
accounting. McPhee (2006), in his study on the use of accrual accounting within the public
sector, has lists down the benefits of accrual accounting implementation which includes the
ability to reflect and provide the foundation for accountability for the additional flexibility
provided to the public sector managers. In addition, by extending the notion of performance
beyond what has been done in cash accounting, the accountability can be enhanced.
Fourth, comparability is the other rationale for accrual accounting to be implemented
in Malaysia. From this perspective, a user can compare financial reporting system using
accrual accounting and other accounting basis. Comparisons such as on financial information
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not only can be made among international organizations, but also between the public and
private sectors in Malaysia. For information, reporting comparability is referred to as the
ability of earnings to account similarly for identical transactions and differently for different
transactions. However, it is important to note that improving comparability is not an easy
task for standard setters given the increased level of cross-border transactions over the last
few decades and the historical differences exist in local Generally Accepted Accounting
Principles (GAAP).
In a nutshell, all of the rationales stated above, nevertheless, seem convincing and
relatively strong from the explanations stated. However, the implementation of accrual
accounting to the management of public sector is not without its own criticism. This can be
seen from various research made whereas persistent objections have been made towards
the relevance of accrual accounting to the organization of public sector economy activity.
One of the main critics towards the accrual accounting to be implemented in the
public sector is that accrual accounting is not relevant to the economic management of the
public sector. It is mainly due to the underlying or inherent differences in the character of
both public and private sector. To be exact, it is argued that the nature of the basic
economic problem differs between public and private sectors. For public sector, economic
activity flows from the operation of public policy. For instance, in a democratic society, the
economic activity is derived from the political process in which the people collectively
decides on the employment of collectively contributed scarce inputs obtained through
taxation in its various forms. In the contrary, decision-making is more concerned with the
allocation of resources to meet consumer demand for goods and services. Indeed, the
allocation of resources in private sector is determined by relative profitability or opportunity
cost.
Secondly, it is to be believed that the need to determine financial position, and a
subsequent need for recognising all assets and liabilities, is not relevant since the
information that has no bearing on decision-making about the use of resources should not
be included. It is because resources in public sector are acquired and allocated with the
political influence rather than the market and thereby determined preferences in the
resources allocation process. From this perspective, accrual accounting has seen to be
limited with the mechanism of resource allocation in the private sector. Additionally, such a
view indicates that the operation of public policy about the use of public resources occurred
without consideration of its economic implications from the decision made.
Thirdly, the issue arise on the accounting for heritage assets. In fact, the issue
regarding the accounting for heritage assets in public sector has been widely debated.
However, the debate can be seen significant in two aspects. First of all, the argument lies a
debate on the general extendibility of the accrual accounting model to all public sector
entities and all types of assets. While some of the public assets are relatively hard to
account with the use of accrual accounting, it is not possible for those assets excluded from
the financial statements. It is because if any of the entities or assets of public sector
excluded from an accrual accounting regime for whatever reason, the determination of
financial position become qualified and left the financial statement in doubt. Secondly, the
investment by communities in heritage assets is commonly important and should be subject
to financial accountability. For example, in European countries, the decision-making about
these assets has been undertaken without financial information or evaluation of the implicit
opportunity cost.
Hence, it is ultimately down to the Malaysian government in weighing all the possible
benefits and drawbacks in making the decision on whether to implement accrual accounting
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in the public sector which the decision actually has been made in June 2011. However, the
Malaysian government needs to always review and overlook the progress of the accrual
accounting implementation for a successful transformation, while in the meantime bear in
mind that not all reform or transformation programs would be an instant hit or success.

9.0 Conclusion
In overall, with the globalization and standardization of accounting standards on the cards,
many of the countries have been given little choice but to follow the world trend. With the
introduction of New Public Management (NPM), many of the government around the world
have shifted from the traditional cash accounting into so-called accrual accounting. There
are different of approaches and methods been used along the implementation process with
countries such as New Zealand and Australia among the most comprehensive in accrual
accounting implementation.
However, it is important for any government who wish to implement accrual
accounting to properly analyse all the potential benefits and drawbacks from the adoption of
accrual accounting. It is due to the facts that accrual accounting might have many benefits
on its own in which the increase efficiency and effectiveness of public management being
the most notable benefit, the accrual accounting might have its own drawbacks which in the
end might outweigh the total benefits. In fact, a thorough study should be conducted
alongside with reviewed of other countries experiences in order to facilitate a more
successful implementation of accrual accounting.
Last but not least, accrual accounting is a long and demanding process which would
provide various obstacles throughout its implementation process. The challenges, however,
not only would occurred before and during the implementation process, but also after the
successful implementation of accrual accounting which often refer to the future challenges
faced by government after using accrual accounting. Therefore, government should always
be prepared and patient along the transformation process as one of those little mistakes
might ruined every efforts that have been made.

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