Back to TopBack to Top
 

Differences between Public and Private Sector Accounting

 

May 5, 2009

“Government should be run like a business.” James Chan examines this myth in “A Comparison of Government Accounting and Business Accounting” in the International Journal on Governmental Financial Management. Chan focuses on the American experience from the days of Thomas Jefferson who wanted the “finances of the Union as clear and intelligble as a merchant’s book.”

Unlike business accounting, public financial management is budget driven. “Budget specialists tend to view accounting as part of financial management, and financial management as part of budget execution. ..(T)he budget serves as the basis of management control and legislative oversight,” according to Chan. He points out the conflicting objectives of budget specialists and accountants in government.  His chart, “Contrasting Views of Two Financial Specialists,” provides an excellent synopsis. This need to satisfy budget and accounting requirements results in more complex charts of accounts and control mechanisms in the public sector.

Chan -A Comparison of Government Accounting and Business Accounting

Chan points out the benefits of many accounting practices that derive from the private sector including double-entry bookkeeping.  However, as described by Norvald Monsen in the same publication, there is a single-entry bookkeeping method in operation in German speaking countries called “cameral accounting.”  Cameral accounting is a single-entry system that provides accrual reporting capabilities.

Monsen – Enterprise Cameralistics

There is significant debate about the need for accrual accounting in government. This controversy increases when considering accrual budgeting . “Government budget specialists greet the introduction of accrual into budgeting with considerable skepticism, ” asserts Chan. The costs to adopt accrual accounting in government can be significant. For example, valuing property and assessing contingent liabilities can be onerous. And, the benefits of accrual accounting can be a disincentive for politicians. Politicians are keen to present budget “inputs” – the amount spent in their districts, not the value of the investment. The true value of government initiatives, including long term liabilities like pension plans, are not of interest to politicians looking for re-election.

Chan attempts a big picture view showing how elements of both business and government accounting are similar or converging. The need for transparency is an important trend in both the public and private sectors. This is a very interesting point given the complexity of business reporting requirements, particularly for publicly-traded companies in the United States. Unlike accrual accounting, there are incentives for politicians to support transparency. Transparent and financial facts show whether governments have executed on promises. Without these facts, opponents or the press are free to present misleading information.

The following two tabs change content below.
Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

Leave a Reply