Government accrual accounting
March 28, 2010 3:26 AM   Subscribe

Why do governments use cash accounting and not accrual? Are there any governments that DO use the accrual method? I'm interested in the history, legality, challenges, anything. Any location, any government.

My searches keep bringing up the "if the gov't was accounting correctly, then..." sites, which have been around as long as the internet. I want to learn how the status quo came to be, and whether it could ever change.
posted by FuManchu to Law & Government (7 answers total) 3 users marked this as a favorite
 
Yeh, its one of those internet memes that if the US Government used the same accounting standard as a business they'd be bankrupt, therefore there MUST be a problem.

Well, people that opine that typically don't understand accounting nor the purpose of government. It really boils down to this: would folks seriously like their government run like a business? Where every entity in the country, every man, woman & child must show positive economic value? As close to the United States appears to be to such a scenario, it actual practice it is pretty far away from that grim reality.

But specific to your query, cash accounting is commonly used by developing nations. The International Consortium on Governmental Financial Management has a lot of relevant information. They published a paper in 1997 which took a broad look at the topic while discussing Vietnam specifically. Its very accessible, and not at all a bad read.

I'd love to engage this in detail and contribute a thousand words or so (especially if we could finally put that deceptive meme to rest once and for all) but I'm on a client deadline and just looked at Ask while taking a brief break. I'll check back later and hopefully will be able to contribute more.
posted by Mutant at 4:15 AM on March 28, 2010


Whoops!

They published a paper in 1997 which took a broad look at the topic while discussing Vietnam specifically. Its very accessible, and not at all a bad read.
posted by Mutant at 4:17 AM on March 28, 2010




The Canadian government also uses accrual accounting. They previously used cash basis accounting, but transitioned to accrual over the past decade or so. This was a really difficult transition - under cash basis each capital asset was just expensed as purchased, so each department had to go back and find the capital cost of each asset, then calculate a reasonable amount of accumulated amortization to date - and there are still a lot of issues with their figures for assets and liabilities. But over time, with new processes in place, it will get better.

One of the big problems is that they still don't use full accrual budgeting, which makes it difficult to compare each department's performance relative to the budget. It's also difficult for many parliamentarians to grasp accrual budgeting - they mostly care about the cash that the government will be spending each year, not the "expense" under GAAP.
posted by barney_sap at 6:40 AM on March 28, 2010


Mutant makes some interesting points, though I disagree with the proposition that government being run like a business is a bad thing. The notion of having to treat every person as an entity with positive economic value is a red herring and so is irrelevant to the question.

One explanation is that cash accounting, especially for developing nations, is easier to manage than accrual accounting. For example, it is easier to buy a widget for a government bureaucracy and expense immediately than it is to figure out its useful life, apply a particular depreciation method to it, and amortize its cost over that useful life.

Finally, government employees, especially politicians, are not exactly financially literate, even in the best-run and least-corrupt countries. Accrual accounting requires a level of financial literacy that cash accounting does not.
posted by dfriedman at 6:50 AM on March 28, 2010


The UK uses accrual too.
posted by greycap at 6:52 AM on March 28, 2010


Thanks, everyone.

Interesting -- I didn't know so many are already on the accrual method. The media reporting and executive summaries still seem to be done on the cash basis, though. I'm no expert on government accounting, though, so the divergence from typical company accounting may be confusing me.

Mutant -- that paper is great, and gives a decent history of the issues like what I was looking for. Thanks.
posted by FuManchu at 11:13 PM on March 28, 2010


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