Exploring the relevance of accounting frameworks in the pursuit of financial sustainability of public sector entities : a holistic approach

Abstract

Financial sustainability in public administrations is an emerging area of research. Prior literature has focused on the possible causal factors of financial distress (Groves and Valente 2003; Kleine et al. 2003; Carmeli 2007; Jones and Walker 2007; Zafra Gómez et al. 2009; Padovani and Scorsone 2011; Cohen et al. 2012), and discussed the need to create favourable conditions to improve financial sustainability (Torres and Pina 2001; Adams et al. 2014; Ball et al. 2014; Drew and Dollery 2014; McKinney 2015). There is an emerging body of literature on the determinants of financial sustainability and the implementation of financial sustainability initiatives by governments (Brusca et al. 2015; Navarro-Galera et al. 2016; Rodríguez Bolívar et al. 2014, 2016). While international organizations (European Commission [EC] 2013; International Public Sector Accounting Standards Board [IPSASB] 2013) and prior literature (Navarro-Galera et al. 2016; Rodríguez Bolívar et al. 2016) appreciate the usefulness of government financial statements for reporting on the financial sustainability of public sector entities, there is no elaboration on how governmental accounting can contribute towards this objective. In other words, the current literature lacks focus on the role of accounting frameworks in the endeavour to make public sector entities financially sustainable. Financial sustainability of a public sector entity embraces its ability to manage its financial capacity in the short and long term while maintaining the level of services. It requires the implementation of policies that ensure feasible provision of public services to the present generation, while protecting the needs of future ones, thus ensuring intergenerational equity (IPSASB 2013). The evaluation of public value should take into consideration the long-term financial sustainability of political programmes and policies. Liguori et al. (2012) highlighted the limitations of general-purpose financial statements aimed at satisfying these information needs. From this perspective, Antonio and Hay (1990) identified important disclosures regarding present or expected events that would impact future expenditures and revenues to include information on long-term debts, pension obligations and other employee benefits. Given that such information involves statistical and economical computations that do not normally fall in the domain of accountants, one could question how information from public sector accounting may support a financial sustainability framework for governments to achieve more sustainable outcomes. In the next section, we present a broad view of what accounting frameworks are, since we intend to provide a holistic approach of the contribution of public sector accounting towards financial sustainability. However, it is still necessary to refer to extant conceptual frameworks for financial reporting in order to start exploring the usefulness of accounting frameworks as a reference for useful information to support financial sustainability, which is the objective of this chapter. The need for financial sustainability in public administrations has been brought in the limelight by the financial and economic crisis (Rodríguez Bolívar 2017). The reaction of the European Union (EU) included a demand for better governmental accounting systems that would provide more reliable data that would ensure better monitoring of EU member states performance and financial condition.