Public Sector Accounting Sixth Edition Jones & Pendlebury

Public Sector

Accounting
Sixth Edition

Rowan Jones
Maurice Pendlebury

This book is about government budgeting, accounting and

auditing technique, from an accountants perspective, in the
context of the nature of government, governance and public
management, public finance and public money. It deals with
the distinctive challenges of performance measurement,
budgets and budgetary control, costing, financial reporting
and conceptual frameworks, and special issues of audit in the
public sector.
Generic examples are used throughout the book to illustrate
the issues involved.
This edition is very different from previous editions in reflecting
the fundamental changes in public sector accounting over
the past generation, including a narrowing of the differences
between government and business accounting.
Public Sector Accounting is the ideal choice for any student
needing a clear, concise guide to the key issues of this
complex, topical subject.
About the Authors
Rowan Jones is Professor of Public Sector Accounting at the
University of Birmingham.
Maurice Pendlebury is Emeritus Professor of Accounting at
Cardiff University.

Front cover image: Getty Images

CVR_JONE0362_06_SE_CVR.indd 1

Public Sector

Accounting
Rowan Jones
Maurice Pendlebury

Sixth Edition

www.pearson-books.com

12/5/10 11:11:37

PUBLIC SECTOR ACCOUNTING

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Sixth Edition

PUBLIC SECTOR
ACCOUNTING
Rowan Jones
Birmingham Business School
Birmingham University

Maurice Pendlebury
Cardiff Business School
Cardiff University

Pearson Education Limited

Edinburgh Gate
Harlow
Essex CM20 2JE
England
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Visit us on the World Wide Web at:
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First published under the Pitman imprint in Great Britain in 1984
Second edition published 1988
Third edition published 1992
Fourth edition published 1996
Fifth edition published 2000
Sixth edition published 2010
Rowan Jones and Maurice Pendlebury 1984, 2010
The rights of Rowan Jones and Maurice Pendlebury to be identified as authors of this
work have been asserted by them in accordance with the Copyright, Designs and Patents
Act 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical,
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publisher or a licence permitting restricted copying in the United Kingdom issued by the
Copyright Licensing Agency Ltd, Saffron House, 610 Kirby Street, London EC1N 8TS.
ISBN: 978-0-273-72036-2
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalog record for this book is available from the Library of Congress
10 9 8 7 6 5 4 3 2 1
13 12 11 10
Typeset in 9.5/12.5pt Stone Serif by 35
Printed and bound in Great Britain by Ashford Colour Press Ltd, Gosport, Hampshire
The publishers policy is to use paper manufactured from sustainable forests.

Contents
Preface
Acknowledgements

The nature of the public sector

1.1
1.2
1.3
1.4
1.5

The nature of government

Governance and public management
Public finance
Public money
Accountants and the public sector

vii
x
1
2
4
8
10
11

Further reading

16

Performance measurement

18

2.1
2.2

19
27

Non-financial performance measurement

Challenges of performance measurement

Further reading

29

Fundamentals of accounting

30

3.1
3.2
3.3

31
36
50

Elements of accounting
Bases of accounting
National accounting and government budgeting

Further reading

52

Budgetary policies and processes

53

4.1
4.2
4.3
4.4

54
60
62
62

The rational control cycle

Fiscal years
Budgeting for inputs, outputs and outcomes
Budgetary processes

Further reading

65

Form and content of budgets

66

5.1
5.2
5.3
5.4
5.5

67
70
77
82
83

Organisational and programme structures

Capital budgets
Line item incremental budgets
Output measurement and outcomes
Zero-base reviews

Further reading

84

Contents

Budgetary control

85

6.1
6.2
6.3

86
89
93

Further reading

96

Costing

97

7.1
7.2
7.3
7.4

vi

Central financial control

Devolved forms of financial control
Budget reporting

Organisational units, programmes and products

Pricing and reimbursement
Incremental changes in output
Outsourcing

98
104
105
106

Further reading

108

Financial reporting

109

8.1
8.2
8.3
8.4

110
117
123
124

Form and content of published financial reports

Accrual accounting: special topics
Policymaking
Conceptual frameworks

Further reading

126

Auditing

127

9.1
9.2
9.3
9.4
9.5
9.6

128
131
133
135
137
139

External auditing
Financial and regulatory audits
Performance audits
Internal control
Materiality
Budget auditing

Further reading

140

Index

141

Preface
This book is about government budgeting, accounting and auditing, from an
accountants perspective. Government budgeting, particularly, can underemphasise even ignore accounting. Our purpose is to portray the whole of government, being the core part of the public sector, through the eyes of accountants.
We do this by concentrating on the possibilities of accounting technique.
Throughout, we combine discussion of the importance of the techniques with
their limitations. Nevertheless, the book depends on the importance of accounting technique.
Historically and around the world, introductory accounting and intermediate
accounting are taught in the context of for-profit organisations. This book
assumes a basic understanding of such accounting. Its method is to focus on
those matters that can be different in governments, even while there is
significant overlap in accounting for governments, non-profits and for-profits.
Chapter 1 provides an introduction to the nature of the public sector, the
heart of which is the sovereignty of governments ultimately controlled by
politicians. It introduces the nature of government, governance and public
management, public finance, public money and the role of accountants in the
public sector.
Chapter 2 is an overview of performance measurement, which permeates all
aspects of government budgeting, accounting and auditing. It identifies distinctive challenges of performance measurement for accounting.
Chapter 3 details the technical fundamentals of accounting. These are the
same in all organisations, whether governmental, for-profit or not-for-profit, but
the public sector context shifts the emphasis among these fundamentals. The
chapter also discusses two other forms of accounting national accounting and
government budgeting that complement and sometimes compete with public
sector accounting.
Chapters 4, 5 and 6 are concerned with budgeting. Chapter 4 deals broadly
with budgetary policies and processes. Chapter 5 explains the common forms,
and associated content, that government budgets can take. Chapter 6 concerns
budgetary control, which is a dominant function of accounting, but one that can
be exercised in different ways.
Chapter 7 addresses costing techniques, which by their nature are less extensively used in government than in for-profits but, when they are used, can
have important consequences for managers, politicians, service recipients and
taxpayers.
Chapter 8 is about financial reporting. There are significant overlaps between
reporting standards for all organisations, but there are distinctive issues for
governments budgetary reporting, consolidated financial statements and special
accrual accounting issues. There are also particular issues relating to policymaking
and policymakers conceptual frameworks.

vii

Preface

Chapter 9 deals with auditing. Here, too, there is much overlap between
organisations of all kinds, but the distinctive issues in government are of importance. These are the definition of audit independence; financial, regularity and
performance audits; internal audits and internal control; attitudes to materiality;
and budget auditing.
Every chapter includes a further reading list. These are not usually developments of technical accounting matters. Some of the publications listed are from
non-accounting literature, for the accountant to use in a wider understanding of
technique. Most, however, are from accounting literature. This typically takes the
understanding of technique as given but then situates it in wider contexts,
allowing a fuller discussion of the strengths and weaknesses of technique. This is
especially necessary given that technical accounting developments tend to be
made by accountings standard-setting bodies or consultants, not academics.
Nevertheless, it remains true that accounting technique and this wider context
are difficult to marry. There is little theoretical understanding of the relationship
between government accounting systems and social, economic and political
success. The further reading lists therefore mainly provide a basis for developing
our understanding.
The illustrative examples used throughout are generic, for the mythical City of
Eutopia, and themselves are based on pure matters of accounting technique. In
Eutopias financial statements we use generic forms rather than arbitrarily imposing one particular set of accounting standards. The examples use numbers but
not mainly for the purposes of training the reader in making calculations. Rather,
this is done to make the illustrations more meaningful. We represent Eutopia not
as an ideal government but an ideal for understanding the possibilities and
limits of government accounting technique. We willingly concede that soldiers,
police officers, social workers, teachers and nurses (among others) might imagine
that Eutopia is situated on the edges of an infernal place to which its accountants
daily commute.
This sixth edition is very different from the previous editions. The earlier
editions were essentially the first edition, published in 1982, with marginal
changes made since then. The sixth edition, however, reflects the fact that there
have been fundamental changes in public sector accounting over this last generation and a half changes that no doubt, in part, have been facilitated by the
information revolution we are living through. The major changes since the 1970s
are that there were then no sets of public sector accounting standards, but now
there are, including one international set, and some of them are based on
for-profit standards. The only set of public sector auditing standards then was
that used by the US Federal Government, known (as it still is) as the Yellow Book.
It was, however, actually a booklet of 54 small pages. Also, the recording, use and
publication of output measures were then the exception, but now they are ubiquitous. The result of all these changes is that there has been a narrowing of the
differences between government, non-profit and for-profit accounting.
The changes have also brought greater comparative understanding of government accounting between jurisdictions within each country and between countries. No longer is it possible to make the joke, as one professor did in 1986 when
introducing a seminar on international government accounting, that the term

viii

Preface

seemed to him to be an oxymoron. Having said that, Anglophone accounting

still dominates the discourse (if quantity of literature is the measure), which is an
especially troubling matter given that, presumably, most government accounting
in the world is not practised in English. This book does not help in this: it is
firmly Anglophone, primarily as a generalisation of UK and some US theory and
practice.
Rowan Jones and Maurice Pendlebury

ix

Acknowledgements
The authors acknowledge, with the usual caveat exempting them from blame,
the following, who have personally helped over the years in our understanding
of public sector accounting: in the USA, Gary Giroux and James Patton; in Europe,
within the Comparative International Governmental Accounting Research network (CIGAR), Klaus Lder and Aad Bac, and Berit Adam, Eugenio Caperchione,
Jan van Helden, Susana Jorge, Evelyne Lande, Frode Mellemvik, Norvald Monsen,
Vicente Montesinos, Riccardo Mussari, Salme Nsi, Kuno Schedler, Jean-Claude
Scheid and Torbjrn Tagesson.