The purpose of this paper is to review and analyze the literature on consolidated financial statements (CFS) in the public sector published from 1980 to 2015 in public sector accounting and management journals, and propose a future research agenda.
Adopting a structured literature review methodology, the authors investigate how the CFS literature is developing and what its focus is.
The authors identify five major topics: the definition of the consolidation area; the identification of the reporting entity; the private vs public sector accounting standard dichotomy; the relationship with the statistical rules; and the usefulness of CFS.
The authors analyze these topics, highlighting the growing implementation of CFS in different contexts (mainly focusing on governments outside the USA) and provide suggestions for future research.
Santis, S., Grossi, G. and Bisogno, M. (2018), "Public sector consolidated financial statements: a structured literature review", Journal of Public Budgeting, Accounting & Financial Management, Vol. 30 No. 2, pp. 230-251. https://doi.org/10.1108/JPBAFM-02-2018-0017Download as .RIS
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During the last decades, in the wake of the reforms stimulated by the new public management philosophy (Christensen and Lægreid, 2002; Gow and Dufour, 2000) significant developments in public sector financial management have been observed in several countries. Among other aspects, these reforms have primarily stimulated the decentralization of many services to be provided to citizens through public-private partnerships (Bastida and Benito, 2006). This decentralization in turn has progressively required an appropriate accounting tool, namely, consolidated financial statements (CFS), to provide a complete picture of the above-mentioned partnerships (Olson et al., 1998), satisfying internal and external accountability needs. Accordingly, public sector CFS have been implemented, on a mandatory or a voluntary basis, in various countries (Bergmann et al., 2016).
In the US context, the Governmental Accounting Standards Board (GASB) issued Standard No. 14, which was the first accounting standard to be applied for consolidation by state and local governments (LGs). Other key standards are GASB No. 34 (Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments) and Statement of Federal Financial Accounting Concept No. 2. The first one establishes financial reporting requirements for the State and LG, including a government-wide financial statement for all government activities, although separate rows are used to distinguish between governmental and business-type activities; these statements are similar to private sector consolidated statements. Statement of Federal Financial Accounting Concept No. 2 (issued by the Federal Accounting Standards Advisory Board – FASAB) identifies the reporting entity at the federal level. Several other countries (such as Sweden, the UK, Canada, New Zealand, and Australia) later issued standards on consolidation (Grossi and Pepe, 2009). At the international level, the International Public Sector Accounting Standards Board issued IPSAS 6, recently superseded by IPSAS 35, according to which “Consolidated financial statements are the financial statements of an economic entity in which the assets, liabilities, net assets/equity, revenue, expenses, and cash flows of the controlling entity and its controlled entities are presented as those of a single economic entity” (see also Mori, 2016).
One of the first studies on the topic (Patton, 1978) investigated the impact of providing two competing municipal reports (fund-by-fund vs CFS) and emphasized the need for further research to achieve sounder results about the topic. Subsequently, several studies were published, aiming to investigate both technical and methodological issues, such as the definition of the reporting entity and the boundaries of the “public sector group,” the selection of a proper method of consolidation, and so forth. Furthermore, scholars have observed the applicability of private sector criteria of consolidation (and the related accounting standards) in the public sector realm (Broadbent and Laughlin, 1998; Lapsley, 1999; Olson et al., 1998). A different point of view is analyzed with the so-called “whole-of-government accounts (WGAs)” (Chow et al., 2007; Walker, 2009), which refer to the overall financial position of the government of a particular jurisdiction and are prepared via the consolidation of the financial statements and transactions of all the entities controlled by the jurisdiction’s government (Grossi, 2016). Finally, scholars have focused on the relationship between statistical and accounting approaches to public sector consolidation (Barton, 2011). Indeed, the so-called government financial statistics (GFSs), looking at the general government sector, aim to provide macroeconomic information concerning the different sectors of the economy (International Monetary Fund, 2014). Even though the GFSs present a somewhat consolidated view, including all levels of government, the control is not a prerequisite, as in the case of the CFS (Bergmann, 2009).
Accordingly, public sector CFS are an important area within public sector accounting, and there is still a need for more empirical and theoretical research in this field based on a separate research agenda, since the public sector is organizationally specific. More concretely, taking into account the growing relevance of private-public partnerships, state-owned enterprises, and public and public collaborations around the globe, as well as the increasing attention paid by academics and practitioners to the topic because of the mandatory (or voluntary) adoption of CFS, there is a need to investigate how CFS are evolving within the public sector context. Furthermore, considering the lack of systematization of the knowledge about the topic, this paper reviews the public sector CFS literature to offer an overview of the state of the research on the topic, highlight the main issues investigated by previous studies, and discuss the main findings. Moreover, this paper outlines a future research agenda based on under-investigated issues that deserve further attention. Therefore, aiming to draw implications for both scholars and practitioners regarding the main evolution of CFS and future research needs, through a structured literature review methodology (Dumay et al., 2016; Guthrie et al., 2012; Massaro et al., 2016; Tranfield et al., 2003), this study intends to answer the following research questions:
How is the CFS literature within the public sector developing and what is its focus?
What is the future of CFS research within the public sector?
The remainder of the paper is structured as follows. After a description of the research methodology, the third section contains a preliminary descriptive analysis of the selected papers. The next section investigates these articles in greater depth, while the last one critically discusses the results, outlining directions for future research.
As stated above, the strategy adopted in the present study is based on a structured literature review approach. Accordingly, the data were retrieved and gathered through a prescribed and replicable methodology, aiming to provide a clear path for synthesizing and appraising the main findings of the relevant studies on a topic. However, even though a structured literature review has to follow several steps, listed in chronological order, the process should not be considered as a strict series of events. Thus, the final implementation of a literature review is fluid.
Therefore, the methodology used in this study is based on the following steps:
planning the review;
conducting the review (which consists of a comprehensive search, quality assessment, and data extraction); and
reporting and dissemination, which include both a descriptive analysis of the field and a more in-depth (thematic) analysis.
The main aim of the first step (Planning the review) is to take into account whether a review is opportune or not and to prepare a protocol, as well as defining the questions that the review intends to investigate. First, there is a need to ascertain whether to date no other comprehensive literature review exists on public sector CFS (as highlighted in the following section; see Table VII). Second, writing a protocol means explaining the procedure adopted in the review to increase the reliability of the research, at the same time allowing the readers to evaluate and replicate the adopted criteria. It is expected to support the research objective, clarifying the state of the art and what is lacking in knowledge in the investigated field. As noted in the previous section, the first research question concentrates on how the CFS literature within the public sector is developing, highlighting the focus of previous studies. The second research question aims to delineate the future research agenda on public sector CFS.
The second step (Conducting the review) refers to the selection of studies, based on the definition of the keywords and the databases to be used. Additionally, this step concerns the clarification of inclusion/exclusion criteria based on definite and precise rules. In this study, a funnel method was used, which consists of extensive research with the aim of encompassing all the potentially relevant papers, followed by a restrictive selection.
Therefore, assuming as a reference the above-mentioned definition of CFS and the main related accounting standards, in the first place the search was based on the following nine keywords: ((consolidated financial statements) or (consolidated financial reporting) or (consolidation method) or (methods of consolidation) or (area of consolidation) or (public sector accounting) or (whole of government) or (IPSAS 6/IPSAS 35) or (GASB 14)). These keywords were inserted into three different databases: EBSCO Business Source Premiere, Scopus, and ISI Web of Science. The research spanned from January 1980 to December 2015 and was limited to journal articles (with peer reviews) written in English. The initial output consisted of 1,045 articles, which were cataloged in the Zotero library. Subsequently, we removed any documents that were not papers, such as exposure drafts, calls for papers, highlights, new digests, and official releases (63 documents), as well as all the duplications (266 papers), because several papers were included in more than one database. Finally, we added eight other articles through a residual search, due to their diffusion in the literature concerning public sector CFS. Having completed this preliminary step, a residual number of 724 papers were collected, as Table I illustrates.
After the extensive research, a restrictive selection was carried out, based on a detailed quality assessment of the selected papers. This step is the most challenging and delicate, since it requires a clear definition of inclusion/exclusion criteria. Accordingly, we first avoided referring only to external quality assessment criteria (such as those based on journal ratings); second, the members of the research team held several meetings aiming to define a clear set of inclusion/exclusion criteria. Therefore, the relevance of each paper to this review was based on the following criteria:
Taking into account the fact that the adopted keywords were quite extensive, the online search retrieved many papers concerning other fields and themes. Accordingly, after carefully reading the abstracts, 109 papers were excluded, since they dealt with different fields of research (such as economic psychology, computer networks, public health, engineering, and so on). Similarly, other 236 papers concerning other themes (such as accounting convergence and harmonization, cost vs fair value in both private and public sector accounting, and public sector accrual accounting) were eliminated.
The second exclusion criterion refers to the “private vs public sector” dichotomy. Therefore, all the papers were classified according to their topic, separating the studies concerning the public sector context from those relating to the private sector realm. This last group consisted of 253 papers, which were further classified into two sub-groups to gain a more insightful understanding of their content. The first sub-group contained papers focusing on the private sector context, dealing with CFS issues among other broader topics (54 papers). The second sub-group consisted of papers concerning specific CFS issues, such as theories of consolidation, methods of consolidation, and so forth (199 papers).
After these exclusions, 125 residual papers were obtained.
Each co-author read these papers separately, evaluating their relevance in accordance with the third criterion of exclusion: papers focusing on specific public sector CFS issues vs papers focusing on the public sector context, which mentioned CFS but without any in-depth investigation of their specific topics. This second category mostly consisted of studies concerning public sector reforms; as a consequence, these studies considered both CFS and other issues within a broad agenda.
Accordingly – and after several meetings among the authors that led to a shared result – 93 papers were excluded.
The final result was that 33 papers were relevant to this literature review. Table II shows all the mentioned steps.
In the third step (Reporting and dissemination), each author undertook a thorough separate reading of the selected papers. This crucial step aimed to highlight all the information and data on which the analysis would be based. The following section will deal with a descriptive analysis, the primary purpose being to provide the first overview of the selected papers (i.e. journal and year of publication; country analyzed in the study), at the same time as investigating the impact of each article and the methodological approach adopted.
Building on these preliminary findings, the fourth and fifth sections investigate the papers more thoroughly, providing answers to the research questions of this study.
A descriptive analysis provides full and detailed information extracted from the selected papers using a simple set of categories, such as: the year of publication; the countries investigated in the study; a general profile of the article; the research methodology. In this literature review, in accordance with Broadbent and Guthrie (2008), the following classification criteria were used:
journal and journal subject area;
year of publication;
citations of the articles; and
Table III classifies the papers according to the journals in which they were published and the subject area to which these journals belong (the asterisk highlights the classification according to the journal quality list (JQL)).
More specifically, the classification is based on two main subject areas – “finance and accounting” and “public sector management” – in accordance with the JQL (57th Edition, April 18, 2016). Taking into account that several journals were not cataloged in the JQL, they were included in the “finance and accounting” area or the “public sector management” area according to their primary aim, as explained on the journal’s website. However, a residual area was also identified.
Table III shows that CFS have been considered and investigated not only in the accounting field (16 papers) but also from a managerial perspective (15 papers). This could mean that the previous literature has focused on both technical issues (such as the methods and theories of consolidation) and managerial implications deriving from the adoption of CFS. However, it is worth noting that this result is due in large part to two special issues published by an accounting-oriented journal (Abacus) and a managerial-oriented journal (Public Money and Management).
As far as the year of publication is concerned, Figure 1 illustrates that, while a limited number of papers were published from 2000 to 2008, there was a considerable increase in the subsequent years, especially 2009 and 2011, when the two above-mentioned special issues were published. This growth emphasizes the increasing relevance of public sector CFS. As we will comment on later, several critical issues have attracted the interest of scholars; we argue that several topics deserve attention as CFS become more important and their adoption wider.
The third classification criterion concerns the geographical area investigated in the paper. Table IV classifies articles according to the geographical area on which they concentrated, taking into account that several papers have dealt with more than one country.
While Panel A refers to countries, Panel B is based on their aggregation as continents (Africa, America, Asia, Europe, and Oceania), also considering a residual area (Other). However, it should be observed that several papers have adopted a comparative approach, investigating two or more countries (i.e. Brusca and Montesinos, 2009; Grossi and Pepe, 2009). Panel A shows that Australia (11) and the UK (9) are the most investigated countries, although a considerable number of papers have focused on New Zealand (5), Italy (5), and the USA (4). The case of Vanuatu, as an example of the adoption of CFS in a developing country, is also worthy of mention. According to Panel B, the most investigated area is Europe (22 papers), followed by Oceania (17 papers) and America (7 papers); there are no papers concerning Africa and Asia, while there is one comparative article analyzing the OECD countries. According to these findings, several interesting questions may deserve attention: What are the main obstacles to the adoption of public sector CFS in developing countries? Are there any lessons to be learnt from the experience of countries where CFS have a long tradition? Why are some geographical areas investigated less than others?
The fourth criterion of classification concerns the impact of the articles selected for this review, expressed as the number of Google Scholar citations.
These citations were downloaded on October 9, 2017, and Table V illustrates the top ten articles by citation. Besides, to avoid the potential bias due to the year of publication (older papers can collect more citations than more recent articles), a second ranking was calculated. Accordingly, Table VI shows the top ten papers by citation per year. Comparing Tables V and VI, nine articles are common to both rankings, the only difference being the article by Wise (2006), which is included only in the first table, while the study by Walker (2011) appears only in the second table (citations per year). This result means that a series of studies has attracted the interest of several researchers, contributing considerably to the development of public sector CFS.
Finally, the last classification criterion concerns the methodological approach adopted in the selected studies. Adapting the attributes used by Guthrie et al. (2012) as well as those by Dumay et al. (2016), this study adopted seven categories. Table VII shows the results.
The first four research methods concern studies that are empirical in nature: case/field studies and interviews (e.g. Chow et al., 2009; Grossi, 2009; Lombrano and Zanin, 2013); historical analysis/content analysis (e.g. Newberry, 2011); surveys, questionnaires, and empirical (e.g. Newberry and Pont-Newby, 2009; Wise, 2010); the quantitative and combined approach (e.g. Tagesson and Grossi, 2012). The next two attributes are normative in nature: commentaries and normative (e.g. Bergmann et al., 2016; Grossi and Pepe, 2009); and theoretical (e.g. Bergmann, 2014). It is worthy of mention that there are no previous structured literature reviews.
As Table VII shows, the research method most commonly employed is commentary/normative/policy (13 papers), followed by case/field studies and interviews (8 papers) and theoretical/conceptual papers (5 papers). Moreover, historical analysis/content analysis (3 papers), survey/questionnaire/other empirical (3 papers), and the quantitative/combined approach (1 paper) are less popular in the public sector CFS research. The prevalence of normative approaches may derive from the need to understand and clarify several technical issues gradually, such as the identification of the reporting entity and the definition of the consolidation area. As long as CFS become more relevant, as their growing adoption level suggests, further studies more based on accounting theories and other methodological approaches (i.e. quantitative methods) will be required to investigate other relevant issues, such as the use and usefulness of CFS for internal as well external actors.
Public sector CFS: literature development and focus
Taking into account the first research question of this study, this section aims to scrutinize the selected papers in greater depth to investigate how the CFS literature is developing as well as to unveil the main issues on which previous studies have focused. Table AI provides a summary of the articles selected for this review; the last column of the table summarizes their main findings, which have been assumed as a starting point to highlight the strengths and weaknesses of previous studies. In so doing, we aim to underline the main topics debated in the literature, paving the way to revealing whether there are lessons to be learned from them regarding the development of CFS.
From a theoretical point of view, it worth mentioning that several papers have mainly dealt with theories of consolidation (proprietary, entity, and parent company theories); this finding could be interpreted as a signal of the difficulties in applying these theories in the public sector. For example, scholars (Bisogno et al., 2015; Gardini and Grossi, 2014) have discussed the adoption of the proprietary theory, arguing that it is not appropriate in the case of public sector CFS, in which the entity theory seems to be more pertinent. Additionally, only a few papers have explicitly referred to an accounting theory (the legitimacy, institutional, agency, or stakeholder theory); therefore, several recent articles (Bergmann, 2014; Bisogno et al., 2015; Brown, 2011; Grossi and Steccolini, 2015) have highlighted the need to find a basic accounting theory aimed at strengthening the research in this field.
Moving on to a more detailed analysis of the selected papers, we classify the selected articles according to the main issue that they debated:
the definition of the consolidation area and the concept of control (i.e. Chow et al., 2009; Howieson, 2013), compared with other alternative approaches (i.e. the budgetary perspective: Bisogno et al., 2015), also illustrating the obstacles to the implementation of CFS (Grossi, 2009) or proposing a new method of consolidation to assess the group’s solvency and liquidity (Lombrano and Zanin, 2013);
The following sections will deal with these issues in detail. Through this classification, we aim to provide a detailed and critical analysis of the main findings of the previous studies to outline under-investigated areas, as we debate in the last two sections.
The definition of the consolidation area
The most debated issue concerns the definition of the consolidation area, which means deciding which entities have to be included in the public sector CFS. According to the IPSAS 35 terminology, this means identifying the economic entity, defined as “a group of entities comprising the controlling entity and any controlled entities.”
Bearing in mind that several countries define the consolidation area following the national or international accounting standards that they have adopted or are intending to adopt (Bergmann et al., 2016; Grossi and Pepe, 2009), two main trends seem to emerge. The first one is essentially based on the control approach, while the second pattern relies mainly on the way in which central governments finance other entities, as in the case of the USA and Australia.
At the international level, IPSAS 35 defines the consolidation area according to the control approach; however, this approach is largely influenced by the private sector context (Bisogno et al., 2015; Day, 2009; Grossi and Steccolini, 2015; Tagesson and Grossi, 2012), as demonstrated by the substantial alignment between IPSAS 35 and IFRS 10 (i.e. the international private sector accounting standard concerning CFS). Academics (as well as practitioners) have debated this alignment extensively, considering it as a sort of colonization of the private sector accounting practices, although the experience of the UK department (which adopts the private sector control approach) has been considered to be positive (Heald and Georgiou, 2000; Wise, 2010) and in some cases wishing for a higher degree of private sector management techniques (Bastida and Benito, 2006). The main problematic aspect is the definition of economic control as well as consolidation boundaries (Bergmann, 2014; Chow et al., 2009; Day, 2009; Howieson, 2013; Walker, 2011), with the central risk being to provide subjective interpretations because of the historical, political, and social contexts of each country (Grossi and Pepe, 2009). For this reason, scholars (Bisogno et al., 2015; Grossi and Steccolini, 2015) have pointed out the importance of considering the public sector peculiarities in defining the control approach.
These problems have led scholars to propose different approaches from the control one. Therefore, on the wave of the American influence, in which the boundaries of the federal reporting entity include all the entities that are primarily financed by the budget of other public administrations (Loughan, 2010), the budgetary criterion has been considered as a valid alternative to the control approach or as a complementary option (Bisogno et al., 2015; Grossi and Steccolini, 2015) to increase accountability. This criterion makes it possible to include in the consolidation area all those entities that are not controlled by the government but are significantly financed by its budget; furthermore, it allows a better comprehension of how efficiently the policies of the government have been carried out with respect to the entrusted resources (Heald and Georgiou, 2009; Loughan, 2010). However, this approach has been labeled as a very restrictive one (Brusca and Montesinos, 2009); accordingly, its adoption in conjunction with the control approach – the hybrid approach (Grossi and Soverchia, 2011) – has been considered as a good compromise between the Anglo-Saxon and the continental European culture, as highlighted by the European Union case. In fact, the CFS of the EU include both the control criteria of the IPSAS’s consolidation standards (since 2005) and the budgetary principle.
It is interesting to note that the two approaches (control and budgetary) depend on the set of accounting standards adopted in each country. In fact, the control approach, which mainly refers to the UK, Australia and New Zealand, means aspiring to convergence between public and private sector accounting rules. On the other hand, the budgetary approach is characterized by an influential role of the government, which means that private sector accounting standards are widely modified to take into account the particularities of the public sector (Grossi and Pepe, 2009). These trends are supposed to be influenced by the debate concerning the adoption of national vs international accounting standards. However, the adoption of the IPSASs could be obstructed by cultural reasons as well as technical and legal issues (Grossi, 2009), even if this adoption could foster international harmonization, enhancing comparability. Nevertheless, the diffusion of the international accounting principles could slacken because of the strong influence of the private sector rules (namely the IFRSs), recently confirmed by IPSAS 35 (which has replaced IPSAS 6), in which only a few changes, concerning the control approach, have been introduced.
Furthermore, adopting a control rather than a budgetary approach is not a neutral choice; for example, a national telecommunication service provider could be included in the consolidation area according to the control approach, but it should not be consolidated according to the budget approach. Notwithstanding these difficulties, the control approach is the most frequently adopted one (Walker, 2011; Wise, 2006). However, scholars (Bergmann et al., 2016; Bisogno et al., 2015; Grossi and Steccolini, 2015) have largely investigated other alternative approaches (the budgetary, organizational and legal, statistical, and risk methods), as well as consolidation methods such as the so-called “territorial consolidation method” proposed by Lombrano and Zanin (2013).
As a final note, we argue that previous studies have mainly debated this central topic by focusing more on the technical issues and their implications. Only a few papers have analyzed these issues in conjunction with the information needs of internal and external stakeholders (Grossi et al., 2014; Howieson, 2013). Accordingly, as we will comment on later, an under-investigated area seems to emerge: the link between the definition of the consolidation area and the objectives to be achieved through the CFS. This in turn means understanding who the potential users of these reports are and the possible uses of the information that they provide.
Identification of the reporting entity
The second issue debated in the selected papers (strictly related to the previous one) concerns the identification of the reporting entity (and which organizations should be included in the consolidation area). The first case is when the reporting entity is a central or a federal government, while the second case refers to the “municipal group,” in which a municipality is the reporting entity.
More specifically, in the first case, a central or a federal government can include in the consolidation area only central (i.e. national) public sector entities (such as ministries and their agencies) or all the other local public sector entities as well (such as municipalities, universities, and so on). In this last circumstance, all the consolidated entities, considered as a whole, are included in the so-called WGAs (Grossi, 2016).
However, the expression “WGAs” could be misleading, with the risk of being a misnomer (Brusca and Montesinos, 2009). According to scholars (Daffin and Hobbs, 2011; Day, 2009; Walker, 2009, 2011), several differences can be noted due to the rules and the jurisdiction of each country.
For example, in the UK the WGAs include all the state levels (both central and LGs, the inclusion of which has been explained in the light of fiscal planning: Heald and Georgiou, 2011) and public corporations. However, the WGAs do not include the Parliament, the National Audit Office, and the nationalized banks (Grossi, 2016; HM Treasury, 2017). Conversely, Estonia’s WGAs include the National Bank. Furthermore, the WGAs of other jurisdictions (such as New Zealand and Australia) do not include both LGs and universities. This exclusion has been explained in the light of a subjective interpretation of the concept of control (Wise, 2006), namely, that the central government does not “control” some local entities.
Apart from the latitude assigned to the concept of WGAs, it is interesting to observe that, while some legislation provides a consolidated view only at the central level, others are mainly focused on the local governmental level.
An interesting case is that of Spain, where the central, regional, and LGs are largely independent of each other (Brusca and Montesinos, 2009; Grossi and Pepe, 2009). Accordingly, each level of government prepares its own CFS.
In Italy, characterized by various similarities to the Spanish context, significant reforms have been introduced recently. In effect, in the past decades, CFS were not mandatory; on the same wavelength, WGAs were not required. Therefore, CFS were prepared voluntarily by a restricted number of LGs, based on the IPSASs (Gardini and Grossi, 2014; Grossi, 2009). More recently, after an experimental test period of three years, CFS became mandatory for all local governmental entities from 2016 onwards.
Future comparative studies are highly desirable to unveil the reasons for the main differences between different legislations, which in turn would mean understanding the primary underlying objectives of each approach and the information that CFS/WGAs are expected to provide.
Private vs public sector accounting rules
The third debated issue concerns the accounting standards to be adopted in preparing CFS. Indeed, this is a more general question concerning the adoption in the public sector context of private sector accounting standards, which could be considered as a benchmark (Christensen, 2005).
Focusing on standards dealing with CFS, the adoption of private sector accounting standards has been justified in the light of public-private partnerships. In fact, bearing in mind that a public sector entity can control business-oriented firms, the financial statements of which follow private sector accounting standards, adopting these last rules can address several technical issues, facilitating the preparation of CFS.
However, the question is more intricate than it is supposed; for example, while several controlled entities adopt a full accrual accounting system, public sector entities in several countries embrace cash or modified-cash approaches (Manes-Rossi, 2016). This can imply great difficulty in consolidating such different financial statements (Barton, 2011; Chow et al., 2007; Heald and Georgiou, 2000). Accordingly, the use of a cash-based approach has slackened the implementation of the CFS.
Focusing on the dichotomy between the private and the public sector accounting standards, the international scenario shows different pictures. For example, the UK, Australia, and New Zealand adopt the private sector accounting standards (Grossi and Pepe, 2009), while Sweden refers to specific rules adapted to local authorities (Tagesson and Grossi, 2012). Finally, the USA (at both the state and the local governmental level) and Canada use public sector accounting standards.
Accordingly, scholars have highlighted two opposite trends: the first one concerns (mainly Anglo-Saxon) countries where the private sector accounting rules are adopted; the second one refers to countries characterized by accounting standards that adhere to the public sector characteristics.
It is worth noting that this dichotomy also embraces the IPSASs. These standards are influenced by the private sector rules; even though they are adapted to the specific characteristics of the public sector, several critical observations have been made by scholars (Ellwood and Newberry, 2007; Robb and Newberry, 2007). In the EU context, these critics have stimulated a debate on the adoption of the IPSASs, proposing an alternative approach based on a set of European Public Sector Accounting Standards; however, the aim to achieve more harmonized accounting practices in the public sector has persuaded several countries, such as Estonia, Slovakia, and Spain (as well as Israel), to implement international standards (Bergmann et al., 2016).
This debate could benefit from further investigations based on the information that CFS are supposed to provide, taking into account the different goals of the above-mentioned accounting standards and their compliance with the information needs of stakeholders.
The convergence with the statistical regulations
As stated previously, GFSs consider the general government sector, aiming to provide macroeconomic information concerning the different sectors of the economy (International Monetary Fund, 2014). The consolidated view that they present is not based on the concept of control (Bergmann, 2009). Therefore, the fourth very relevant question concerns the relationship between accounting standards and statistical rules, investigating whether they should converge.
This convergence occurs in Australia, since the GFSs are substantially aligned with the accounting standards. The primary aim of this convergence, achieved through individual whole-of-government reporting (WGR) for each governmental jurisdiction, is to harmonize the macroeconomic and microeconomic perspectives from a fiscal point of view, in order to have better information about the economic evaluation of fiscal choices aiming at, for example, ensuring stable economic growth with high employment and low inflation (Brusca and Montesinos, 2009; Challen and Jeffery, 2005; Day, 2009; Newberry and Pont-Newby, 2009; Walker, 2009, 2011).
Australia is the first case in which this approach has been used. According to Barton (2011), Australia represents the world’s leader in adopting the GFS system for governmental accounting purposes.
In a broader sense, the convergence between statistical rules and accounting standards is expected to improve the transparency of financial reports (Brusca and Montesinos, 2009), providing more useful, relevant, reliable, comparable, and understandable information. Scholars (Barton, 2011; Challen and Jeffery, 2005) have highlighted that the use of statistically based definitions aims to increase fiscal stability (namely macro-economic stability) as well as international comparisons (Chow et al., 2007; Heald and Georgiou, 2000); furthermore, this statistically based approach is expected to improve the evaluation of “the performance of the general government sector and the broader public sector of any economy” (International Monetary Fund, 2014, par. 1.2). Indeed, financial markets, credit rating agencies, and analysts refer to global statistical reporting frameworks, based on universal standards such as the UN/EU statistical accounts.
In conclusion, bearing in mind that accounting-based consolidation is generally considered to be useful for macroeconomic policy planning within the government (Barton, 2011), scholars (Chow et al., 2015) advocate convergence with an international statistical framework to improve the usefulness of consolidated accounts for decision makers. Therefore, further studies are required; for example, it would be interesting to debate the information needs of users (and, as a consequence, the potential uses) to be considered in the WGAs in the light of statistical standards.
The usefulness of the CFS
The final but significant issue analyzed by previous studies concerns the relevance of the public sector CFS regarding their usefulness for stakeholders. Usefulness consists of a more comprehensive picture of the “public group,” supporting decision-making processes better and, at the same time, ensuring public accountability (Bisogno et al., 2015; Chow et al., 2007; Grossi, 2009; Heald and Georgiou, 2000; Tagesson and Grossi, 2012; Wise, 2010). CFS, while providing a clearer economic picture of the public group (Bastida and Benito, 2006), would support public sector efficiency, effectiveness, transparency, and accountability (Bergmann et al., 2016; Grossi, 2009) toward both internal users (such as politicians, managers, and employees) and external stakeholders (namely citizens, voters, taxpayers, suppliers, other public administrations, and financial institutions). Performance achieved by a public sector group in providing public services is shown in a clearer way through CFS, which should provide better support for decision-making processes.
However, on one hand, scholars (Grossi and Soverchia, 2011) have raised some doubts regarding this usefulness, namely, the ability of the public sector CFS to improve the decision-making processes of politicians and other stakeholders coupled with the relevance of accrual accounting report results. On the other hand, other research (Bergmann et al., 2016) has highlighted that this tool ensures a comprehensive and useful view for banks interested in the real and effective opportunities of the creditworthiness of the governments and their owned corporations. More generally, CFS could contribute to greater fiscal transparency at the same time supporting policy debates better (Heald and Georgiou, 2011).
Therefore, the usefulness of CFS seems to be taken for granted, with the risk of over-estimating it despite the actual use of CFS in decision-making processes. Coherently, we argue that this area requires further investigation, as clarified in the following section.
Directions for future research: discussion and conclusions
The papers selected for this literature review have largely contributed to the improvement of knowledge on the public sector CFS. Their findings seem to indicate that further studies are required and that several issues deserve attention from both a theoretical and a methodological perspective.
The central under-investigated area concerns the use of CFS. As a matter of fact, the investigation of the users, uses, and primary decision-making processes that CFS would support can help identifying their objectives, at the same time contributing to selecting appropriate rules for the preparation of these reports (Walker, 2009). Accordingly, several preliminary questions of interest seem to emerge: Who are the main users of public sector CFS? Do CFS support the decision-making process of politicians, managers, and other stakeholders? What are the uses of public sector CFS? Will the role of CFS change as they become more popular?
From a theoretical perspective, these (and other similar) questions could benefit from studies concerning the use of accounting information (Van Helden, 2016), concentrating on the information requirements of the decision-making process, including both agenda setting and problem solving. Furthermore, examining the managerial implications, future studies could connect the context and drivers of the information need to the information-seeking behavior of politicians and managers, enhancing the link with CFS accounting legislation and standards.
In so doing, other mainly technical aspects (such as the definition of the consolidation area, the identification of the reporting entity, and the choice of consolidation methods), while being largely investigated already, could be analyzed from a different theoretical perspective. For example, future studies should examine these central issues from the users’ perspective, providing answers to questions such as: What are the objectives that CFS are supposed to pursue in a particular context? Which information should CFS disclose? Is the control approach coherent with the scope of CFS as well as with the information that they provide to users?
Additionally, dealing with the use (and usefulness) of CFS, as well as the underlined objectives that are supposed to be achieved through this tool, would also mean considering the goals of GFSs, which are more relevant and more used for decision-making purposes than for accountability; for example, in the European context, the Treaty of Maastricht defines several criteria, with which EU countries are supposed to comply, mainly based on GFSs. Additionally, GFSs around the world are more harmonized than financial statements, since they are prepared following several national and international standards, such as those provided by the International Monetary Fund (Barton, 2011). Accordingly, further research could investigate the different objectives of each system and each set of rules. If these systems have different goals, it would be normal to obtain different results, for example different measures of the deficit or the net lending/borrowing of the government. The main problem would be understanding whether there is coherence between the goals of these systems and the applied methodologies, taking into consideration the above-mentioned use (and usefulness) of the information provided by such tools.
Following this path, further research could examine the private vs public sector accounting rule dilemma by relating it to the scope of CFS. Possible research questions could be the following: Taking into account both the aim and the uses of CFS, should CFS be based on specific public sector accounting standards? Alternatively, can CFS be based on private sector accounting standards?
Another under-investigated area deserving further attention emerges from the analysis of the selected papers. As a matter of fact, CFS are not mandatory in several contexts; however, as observed in the previous sections, several public administrations (especially at the local level) have adopted this tool on a voluntary basis in different cases (e.g. Italy; Grossi, 2009). However, previous studies have not investigated the reasons for this choice; thus, several questions warrant attention: Are there any strategic reasons that suggest adopting CFS on a voluntary basis? Are the decisions to prepare CFS voluntarily due to the wish to improve political consensus? Institutional and/or legitimacy theory could support future research on these issues.
A gap emerging from the previous studies concerns auditing (Dyson and Hasso, 1998). As CFS become more popular, providing information to external stakeholders, an opinion on their reliability and compliance with accounting rules will become important. Therefore, researchers with experience in auditing and assurance can help to understand whether there is room for adopting standardized rules.
As our final remark, we would like to offer additional suggestions for further research, the relevance of which is expected to increase as a consequence of the growing adoption of CFS. Indeed, researchers who are experts in many areas that relate directly to the CFS research, from both accounting and managerial perspectives, can provide useful insights. For example, researchers who are experts in analyzing financial statements and financial performance can contribute to refining our understanding of the basic accounting figures expressed by the CFS. In the same vein, researchers who have expertise in evaluating the disclosure level, which is expected to gain importance as CFS become more popular, can enhance our understanding of the disclosure determinants concerning public sector CFS. Furthermore, researchers with expertise in decision-making processes and tools supporting strategic decisions can shed light on the use of CFS and their usefulness for external stakeholders. Finally, we would suggest investigating CFS through a comparative approach, namely, comparing how various standard setting agencies, countries, or other rule-making authorities (such as the IMF) implement CFS, WGAs, and GFS.
These are all critical areas for the future of public sector CFS research, representing exciting challenges for both scholars and practitioners.
|Keyword search in the title and/or abstract||588||310||147||1,045|
|“Call for paper/ED, etc.”||−63|
|After deleting “Call for paper/ED, etc.”||982|
|Number of total duplicates||−266|
|After deleting duplicates||716|
|No. of articles found in the residual search||+8|
Notes: Call for paper, ED, highlight, new digest, and official release
Research on relevant articles
|Sample||No. of articles|
|Articles concerning other fields||−109|
|Articles concerning other themes||−236|
|Articles concerning the private sector context (54 + 199)||−253|
|Articles concerning the public sector but not focusing on CFS||−93|
|Studies reviewed (by source journal and its subject area)||No. of papers|
|Finance and Accounting (16)|
|Accounting and Business Research*||1|
|Australian accounting review*||2|
|Financial Accountability and Management*||1|
|Journal of Modern Accounting and Auditing||1|
|Journal of Public Budgeting, Accounting and Financial Management||2|
|Pacific Accounting Review||1|
|The CPA Journal||2|
|Public Sector Management (15)|
|Australian Journal of Public Administration*||1|
|International Journal of Public Administration*||2|
|International Journal of Public Sector Performance Management||1|
|International Review of Administrative Sciences||2|
|Journal of Government Financial Management||1|
|Public Money and Management*||8|
|Other subject areas (2)|
|Economic and Labour Market Review||1|
|International Review of Business Research Papers||1|
Note: *Highlights the classification of journal according to the Journal Quality List
Countries and continents analyzed
|Panel A: Countries||No.||Panel B: Continent||No.|
|Canada||3||Other (OECD countries)||1|
Top ten articles by Google Scholar citations (as of October 9, 2017)
|1||Grossi and Soverchia (2011)||European commission adoption of IPSAS to reform financial reporting||71|
|2||Chow et al. (2007)||Developing whole of government accounting in the UK: grand claims, practical complexities and a suggested future research agenda||71|
|3||Barton (2011)||Why governments should use the government finance statistics accounting system||46|
|4||Heald and Georgiou (2000)||Consolidation principles and practices for the UK Government sector||44|
|5||Walker (2009)||Public sector consolidated statements – an assessment||44|
|6||Grossi and Pepe (2009)||Consolidation in the public sector: a cross-country comparison||34|
|7||Heald and Georgiou (2009)||Whole of Government accounts developments in the UK: conceptual, technical and timetable issues||30|
|8||Heald and Georgiou (2011)||The macro-fiscal role of the UK. Whole of Government accounts||29|
|9||Bastida and Benito (2006)||Financial reports and decentralization in municipal governments||28|
|10||Wise (2006)||Cross-sector transfer of consolidated financial reporting – conceptual concerns||27|
Top ten articles by citation per year (CPY) (as of October 9, 2017)
|1||Grossi and Soverchia (2011)||European Commission adoption of IPSAS to reform financial reporting||11.8|
|2||Barton (2011)||Why Governments should use the government finance statistics accounting system||7.7|
|3||Chow et al. (2007)||Developing whole of government accounting in the UK: grand claims, practical complexities and a suggested future research agenda||7.1|
|4||Walker (2009)||Public sector consolidated statements – an assessment||5.5|
|5||Heald and Georgiou (2011)||The macro-fiscal role of the UK whole of government accounts||4.8|
|6||Grossi and Pepe (2009)||Consolidation in the public sector: a cross-country comparison||4.3|
|7||Heald and Georgiou (2009)||Whole of government accounts developments in the UK: conceptual, technical and timetable issues||3.8|
|8||Walker (2011)||Issues in the preparation of public sector consolidated statements||2.8|
|9||Brusca and Montesinos (2009)||International experiences in whole of government financial reporting: lesson-drawing for Spain||2.8|
|10||Heald and Georgiou (2000)||Consolidation principles and practices for the UK Government sector||2.6|
|11||Bastida and Benito (2006)||Financial reports and decentralization in municipal governments||2.6|
Articles by research methods
|2||Content analysis/Historical analysis||3|
Studies on public sector CFS
|Author||Main aim||Accounting theory||Main findings|
|Barton (2011)||The reason why governments should use the Government Finance Statistic (GFS) Accounting System||Legitimacy theory||The GFS system provides the information required by governments for fiscal policy, resource management, and accountability purposes|
|Bastida and Benito (2006)||The impact of decentralization on municipal financial statements||Theory of financial information||The entities should be included in the global reports if the municipality has the authority to approve their budget|
|Bergmann (2014)||The investigation into the accounting and reporting of government interventions in the UK, Germany, and Switzerland||Decision theory||The global financial crisis has revoked determined unresolved problems of consolidation and financial guarantees in the context of the government sector|
|Bergmann et al. (2016)||An overview of the consolidation approaches in the OECD countries regarding methods and principles to define the area of consolidation||Agency and stakeholder theories||The analysis of the methods and principles adopted by the Organization for Economic Co-operation and Development (OECD) countries concerning the area of consolidation|
|Bisogno et al. (2015)||The investigation of the appropriateness of the “control approach” within the public sector||Agency and stakeholder theories||The public sector CFS, while applying the concept of control, should take into account the public sector characteristics|
|Brown (2011)||The factors of resistance to the introduced Western model of reporting and accountability for the whole of the Government of Vanuatu||Institutional theory||The whole of government’s lack of control over assets and operations, the misuse of public funds, the over-expenditure by heads, and the lack of parliamentary control provide clear examples of the inefficiencies and waste in government|
|Brusca and Montesinos (2009)||Lesson drawing for Spain from the comparative perspective in New Zealand, Australia, the UK, and North America||No||The concept of control, as defined by IPSAS 6, is applied in defining the area of consolidation at several levels (central and local)|
|Challen and Jeffery (2005)||The harmonization of GAAP-GFS (Government Finance Statistics) framework regarding the criteria for the general-purpose reporting entity||No||Using the GFSs to define the reporting entity makes it possible to define the consolidation area without taking into account the concept of control, which is exposed to subjective interpretations|
|Chow et al. (2007)||Developing whole-of-government accounting (WGA) in the UK||Institutional theory||The usefulness of the WGA for macro-economic decision making is expressed in terms of inter-generational fairness and fiscal sustainability, and for exercising control and legitimizing governmental actions|
|Chow et al. (2009)||The practical pursuit and the evaluation of the WGAs in the UK||No||The WGAs do not increase accounting transparency, since they do not follow clear rules in defining the consolidation boundaries and the governmental “control”|
|Daffin and Hobbs (2011)||Description of the main differences between national accounts (NAs) and whole-of-government accounts (WGAs)||No||The study highlights the main conceptual differences between the NAs and the WGAs concerning the standards used, scope, data source, timing, sectoral coverage, consolidation, liability recognition, contingent assets, and liabilities|
|Day (2009)||The history of whole-of-government reports (WGRs) in Australia||No||The control criterion and convergence between the GAAPs and the GFSs to overlap the difficulties in defining the consolidation area|
|Dyson and Hasso (1998)||The auditing of the CFS of the US Government in 1998||No||The auditing revealed that there were several problems, such as incomplete documentation, material internal control weaknesses, and non-compliance with the federal laws and regulations|
|Ewer (2013)||The description of the CFS of the US Government||No||The CFS fairly represent the general financial condition of the federal government, providing financial transparency of federal operations|
|Gardini and Grossi (2014)||The analysis of fair value accounting (FVA) in the CFS of local governments in Italy||No||The use of fair value increases transparency, even though it implies several difficulties in estimating fair values due to the lack of an active and liquid market for certain assets|
|Grossi and Steccolini (2015)||The analysis of the debate concerning the application of the private sector principles in the public sector, with specific reference to the “reporting entity”||Contingency theory||It is necessary to adopt a wider view of the reporting entity, taking into consideration alternative control forms, funding, and financial dependence relationships|
|Grossi and Pepe (2009)||The analysis of the consolidated annual accounts in six countries (Sweden, the UK, the USA, Canada, New Zealand, and Australia) and IPSASB||No||Two conflicting trends have been identified: the first one is characterized by the adoption of private sector accounting standards within the public sector. The second trend is characterized by the adoption of specific public sector accounting standards|
|Grossi and Soverchia (2011)||The analysis of the implementation stage of the EU accounting reform with a focus on the consolidation of the annual accounts||No||The CFS of the EU are based on a hybrid approach (including both the control and the budgetary criteria), representing a synthesis of the Anglo-Saxon and continental European cultures|
|Grossi et al. (2014)||The evaluation of the needs of managers and politicians to improve their ability to take decisions and give an account in a pilot project||No||The consolidated and the segmental reporting provide information for outsourcing choices or financial and strategic control over subsidiaries|
|Grossi (2009)||The analysis of the potential effect of consolidated financial reporting (CFR) in the Italian local governments||No||The CFR provides specific benefits for internal and external users, stimulating the full implementation of accrual accounting. However, several cultural, technical, and legal obstacles were identified|
|Heald and Georgiou (2000)||The UK proposals for the delineation of the consolidated reporting entity||No||In the UK each department is considered as a parent company that controls other entities, namely, NDPBs (non-departmental public bodies) and quasi-public sector bodies|
|Heald and Georgiou (2009)||The assessment of the potential uses, technical issues, and timetable for the publication of the WGAs||No||The area of the UK Whole of Central Government Account (WCGA) is determined according to the powers under statute (public nature, public money)|
|Heald and Georgiou (2011)||The examination of the potential uses of the UK’s WGAs and the discussion of its policy||No||The UK WGAs play a pivotal role, due to their support of macro-fiscal policies and fiscal transparency. They provide useful information concerning public finances, fiscal sustainability, and intergenerational equity|
|Howieson (2013)||The interpretation of the Australian Accounting Standards Board (AASB) 127 and the analysis of practical difficulties in applying the control concept||No||The implementation of the control concept, as defined by the AASB 127 for not-for profit (NFP) public sector entities, implies several conceptual problems. Better identification of the specific public sector information is required|
|Lombrano and Zanin (2013)||The analysis of a new consolidation method (the “territorial consolidation method”) to improve local government accountability||No||The citizens can assess the cost of outsourcing policies and the profit (or losses). The territorial consolidation method highlights the distinction between the cost of municipalities and the delegated entities, showing clear local authority delegation policies|
|Loughan (2010)||The definition of the boundaries of the federal reporting entity in the USA||No||The boundaries of the federal reporting entity should naturally include all the entities that are funded wholly or predominantly by public funds|
|Newberry and Pont-Newby (2009)||The form and the usefulness of the reporting in New Zealand||Agency theory||In NZ WGAs are commercial-style accounts, which cover the public sector as a whole; the distinctive ownership form of control is similar to that of IPSAS 6|
|Newberry (2011)||The analysis of the WGA financial reports in New Zealand from 1993 to 2010||No||The WGA financial reports obscure, rather than reveal, portfolio changes resulting from privatization and the growing involvement in financial market activities|
|Tagesson and Grossi (2012)||How consolidated financial reporting (CFR) affects the financial picture and the comparability of financial data between different Swedish municipalities||No||The CFRs have a significant influence on the picture of the municipality’s economic position and performance. The CFRs contributes to better comparability and to perform a more comprehensive analysis of the municipality’s economic conditions|
|Walker (2009)||The identification of the objectives and the area of consolidation of the reporting||No||The analysis of users and potential uses suggests that the optimal form of reporting by national, state, and territorial governments would take the form of “whole public sector” reports|
|Walker (2011)||The identification of a series of issues concerning the Australian practices over two decades in the preparation of public sector consolidated statements||No||The concept of control has been considered to be inappropriate for determining the scope of consolidation. An alignment between the Australian Government’s financial reports and the Government Finance Statistics is evoked|
|Wise (2006)||The examination of the specific issues of a particular reporting method, consolidated financial reporting, in the Australian public sector||No||The subjective interpretations of the concept of control have caused the exclusion of relevant organizations, such as universities and local governments, which are economically associated with central governments|
|Wise (2010)||The analysis of the issues surrounding the cross-sector transfer of a particular reporting practice for the CFRs in the Australian public sector||Commander theory Agency theory||The whole-of-government consolidated financial reports are useful for the discharge of accountability and decision-making purposes|
We will comment on these issues later.
The paper focuses principally to public sector entities based outside the USA.
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About the authors
Serena Santis received PhD degree in Management and Information Technology from the University of Salerno, Italy. She is Assistant Professor of Accounting at the University of Campania “Luigi Vanvitelli”. Her research interests include consolidated financial statements, financial conditions and financial sustainability in the public sector.
Giuseppe Grossi is Professor in Accounting at Nord University (Norway), a Professor in Public Management and Accounting at Kristianstad University (Sweden) and a Visiting Professor at Kozminski University (Poland). Grossi’s research focuses on hybrid forms of public governance, public budgeting and Whole-of-Government Accounting.
Marco Bisogno is Associate Professor in Accounting at the University of Salerno. He received PhD Degree from the University of Naples “Federico II.” His current research interests are public sector accounting: international harmonization, disclosure, transparency and accountability, financial sustainability, consolidated financial statements, intellectual capital. He serves as an Editor of Cogent Business and Management and he is a member of the editorial board of different international journals.