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ACCRUAL ACCOUNTING AND PUBLIC SECTOR REFORM: NORTHERN TERRITORY EXPERIENCE Ali Rkein (Bachelor of Business and Finance, Master of Accounting Studies, Master of Business Administration in Finance) School of Law and Business Faculty of Law, Business and Arts Charles Darwin University A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy May 2008 Declaration I hereby declare that the work herein, now submitted as a thesis for the degree of Doctor of Philosophy of the Charles Darwin University, is the result of my own investigations, and all references to ideas and work of other researchers have been specifically acknowledged. I hereby certify that the work embodied in this thesis has not already been accepted in substance for any degree, and is not being currently submitted in candidature for any other degree. ________________________________ Ali Rkein May 2008 ii Abstract The reform of the public sector has been a continuing challenge for many governments around the world. In recent years, this reform has become dominated by such terms as ‘new public management’, ‘managerialism’, ‘marketisation’, ‘privatisation’ and ‘commercialisation’.

These terms reflect a broadly-based commercial direction that governments started taking in response to reform’s pressures resulting from a perceived crisis of legitimacy, responsiveness, efficiency and accountability in public sectors. A significant feature of this commercial orientation was the adoption of private sector practices and economic market models by governments and public sector organisations. The underlying principle was competition. Governments believed that competition plays a major role in improving organisational performance, and by subjecting government organisations to relevant forms of competition they would become more cost conscious and results focused, leading to increased efficiency, effectiveness and accountability.

In Australia, this commercial orientation has taken momentum with the introduction of the National Competition Policy, which advocated that to become more economic, efficient and effective, public sector organisations should operate on the same commercial principles as the private sector. In this regard, the policy required Australian governments to ensure competitive neutrality by eliminating resource allocation distortions arising out of government ownership, such as tax exemptions, regulatory advantages, discounted interest rates on loans, and cross- subsidization. Accounting has been a key element of this reform process, with a change being required as the traditional cash accounting system was not capable of providing the additional financial information that was needed as a result of the commercial orientation. In this regard, governments in Australia have introduced a commercial accounting system through the adoption of accrual-based accounting, budgeting and reporting practices.

At first, the adoption of these practices started in organisations that provide business-like services and are in competition with private providers. At a later stage, Australian governments started also to introduce the practices into their whole public sector. iii While accrual accounting was believed to be useful in a competitive operating environment, this study aims to analyse its working in the Northern Territory of Australia where competition is very limited. The high cost of production resulting from a relatively small and dispersed population and the lack of economies of scale have resulted in a small private sector in the Territory.

This has made the provision of many government services driven more by social imperatives than economic imperatives. In this regard, the study intends to assess the extent that commercial accounting practices have achieved their intended reform objectives. This study highlights a number of findings based on an assessment of the Northern Territory public sector’s responses overall, supported by more detailed analyses of accounting changes in two departments. First, the small private sector in the Northern Territory has not supported the creation of a competitive market for most government goods and services.

Second, although accrual accounting has been able to provide full cost information, the heterogeneity of some government services has resulted in a questionable full cost figure. The use of full cost in pricing has not achieved its intended benefits because of the absence of competitive market pressures. Also, the use of cost information in benchmarking has been fragile, mainly because higher costs of services are the result of ‘capital cost disabilities’ that exist in the Northern Territory and may have nothing to do with performance efficiency. Third, this study shows that accrual budgeting has not been used properly and therefore it has failed to achieve its objectives.

Finally, while accrual reporting has improved the completeness of the accounting information available, especially at the whole of government level, it has not changed much from cash reporting in discharging accountability at organisational and whole of government levels. iv Acknowledgements Many people have contributed directly and indirectly to the production of this thesis and it could not have finished without their assistance and patience, to all I am eternally grateful. First, I would like to thank my supervisors Professor Brian Andrew, Professor Ian Thynne, and Associate Professor Ram Vemuri. I am very grateful to you Brian and I would like to express my sincere appreciation and deepest thanks for your encouragement, wisdom and support that went beyond anything I could have expected.

Your good sense, your generosity with time and ideas helped me to bring this work to life. Ian, thank you for your insightful comments and probing questions which resulted in significant contributions to the development of this thesis, and also for your excellent contributions to the ordering and presentation of ideas. I can not adequately express my gratitude to you Ram for your undying belief in me in those moments I was riddled with self-doubt, for your motivation that often meant the difference between progress and stagnation when my energy and interest faded away. Second, I would like to thank the School of Law and Business at Charles Darwin University for giving me the opportunity to teach and gain invaluable experience while undertaking my PhD.

Also, I am indebted for the support and encouragement of my colleagues, especially Professor Gweneth Norris. Third, a special thanks to all staff at the Department of Corporate and Information Services, the Department of Health and Community Services, and other Northern Territory government agencies, who agreed to participate in this study and devoted their time to provide me with the relevant information required to complete this thesis. Finally, I would like to thank my parents for their encouragement and support, especially my father who instilled in my mind the determination to pursue the PhD level from long time ago. A special thanks to my wife Leila and my two daughters Fatima and Mariam, to whom I dedicate this thesis, for their love, support and patience.

v Table of Contents Declaration. v Table of Contents. vi Table of Tables. x Table of Figures.

xi List of Acronyms and Abbreviations. xii Chapter 1 Introduction .1 Background to the Study.4 Importance of the Study .5 Outline of the Thesis. 11 Chapter 2 International Trends in Public Sector Reform.2 Public Sector Reform, an International Perspective .3 Organisational Change as a Key Component of Public Sector Reform.4 Organisational Performance: Accounting & Accountability .1 Elements of Performance .2 Accounting as a Key Element .3 Underlying Significance of Accountability. 53 vi Chapter 3 Public Sector Reform: Australian Responses .2 Public Sector Reform, an Australian Perspective .1 Drivers of Reform .4 Organisational Performance and Accounting Change.

96 Chapter 4 Methodology and Theory .2 Approach to Research .3 Case Studies and Data Collection .1 Case Study Interpretive Approach .4 Theories and Accounting Research.5 Organisational Change Focus .6 Immediate Relevance of Theories and Models. 123 Chapter 5 Northern Territory Public Sector Reform .2 Northern Territory Profile .3 Northern Territory Public Sector .4 Institutional Pressures for Reform .5 Organisational Responses in the NT Public Sector.3 National Competition Policy and the Organisational Reform .4 Corporatisation and Commercialisation.6 Management and Accounting Responses in the Northern Territory Public Sector .1 Main Management and Accounting Initiatives .2 Last Government to Adopt the Change.7 Working for Outcomes Framework. 168 Chapter 6 The Usefulness of Accrual Accounting in DCIS – an Internal Shared Services Provider – .1 Criteria for Usefulness of Accounting Information .2 Accrual Accounting Relevance to Decision Making .3 The Rationale for Full Cost Information.1 Greater Customer Focus.2 Better Resource Allocation .3 Enhanced Performance and Accountability. 235 Chapter 7 Department of Health and Community Services: The Domination of Social Responsibility .4 Social Responsibility of DHCS.5 Usefulness of Accounting Information in DHCS .1 Operational Relations between DHCS and DCIS.

263 Chapter 8 Summary and Conclusion .1 Summary and Discussion of Findings. 298 ix Table of Tables Table 1 Series of statements of accounting concepts. 85 Table 2 Development trend of government accounting (AAS). 90 Table 3 Strategic responses to institutional processes.

114 Table 4 Example of outputs list at DHCS. 158 Table 5 Example of performance measures of an output. 160 Table 6 List of financial statements before accrual accounting. 165 Table 7 Comparison between budgeted capital appropriation and actual capital asset purchases.

214 Table 8 Budget outcome to cash reconciliation. 216 Table 9 Reconciliation of accrual deficit and accrual deficit at DCIS. 218 Table 10 Average salary across states and territories. 243 Table 11 Number of public and private hospitals by states and territories.

244 Table 12 Medical practitioners by sector across states and territories in 2005. 245 x Table of Figures Figure 1 Model for understanding organisational change. 115 Figure 2 Map of Australia. 126 Figure 3 Example of outcome/output structure at DHCS.

158 Figure 4 Sources of revenue at DCIS. 185 xi List of Acronyms and Abbreviations AARF Australian Accounting Research Foundation AAS Australian Accounting Standard AASB Australian Accounting Standards Board ABC Activity Based Costing ABS Australian Bureau of Statistics ACT Australian Capital Territory AR-DRG Australian Refined-Diagnosis Related Group ATM Accounting Theory Monograph CHA Central Holding Authority COAG Council of Australian Governments CPA Competition Principles Agreement CTC Competitive Tendering and Contracting DCIS Department of Corporate and Information Services DHCS Department of Health and Community Services DP Discussion Paper DRG Diagnosis Related Group ED Exposure Draft FASB Financial Accounting Standards Board FMIP Financial Management Improvement Program FTE Full Time Equivalent GAS Government Accounting System GBD Government Business Division GDP Gross Domestic Product GFS Government Finance Statistics GOC Government Owned Corporation GSP Gross State Product IASB International Accounting Standards Board ICD International Classification of Diseases IMF International Monetary Fund IT Information Technology JCPA Joint Committee of Public Accounts MBO Management by Objectives MLFR Merrill Lynch and Fay Richwhite NCP National Competition Policy NPM New Public Management NT Northern Territory xii NZ New Zealand OECD Organisation for Economic Cooperation and Development PAWA Power and Water PIPS Personnel Integrated Payroll System PMB Program Management and Budgeting PSASB Public Sector Accounting Standards Board RCAGA Royal Commission on Government Administration of the Commonwealth of Australia (Coombs Commission) SAC Statement of Accounting Concepts SFD State Final Demand TQM Total Quality Management TPA Trade Practices Act UK United Kingdom UPF Uniform Presentation Framework WFO Working For Outcomes xiii Chapter 1 Introduction 1.1 Background to the Study This section provides some information that is necessary to gain a sense of what the thesis is about and to put the objectives in context. This thesis has four objectives that are discussed later in this section. The public sector around the world has been under scrutiny for a long period and its reform has always been of great importance to governments, public and researchers.

However, the failure of the public sector around the world to respond to some financial crises in the 1970s and to the problems of maintaining economic growth has made the reform inevitable. The public sector in Organisation for Economic Cooperation and Development (OECD) countries was too unwieldy and cumbersome to react in a coherent and measured way to the oil price hikes and the related stagflation of the 1970s. At first, the relatively large size of the public sector was viewed as one major reason behind this failure and therefore the increase of private sector investment in the economy was believed to be a remedial necessity.