Financial Accountability & Management, 28(4), November 2012, 0267–4424

Accounting Reform in the

Government of Canada: Exploratory
Evidence on Accrual Accounting
Adoption and Impact

RAILI POLLANEN AND KRISTIN LOISELLE-LAPOINTE∗

Abstract: This study investigates the adoption of accrual accounting in the

Government of Canada. Data were collected through interviews of senior officials at
central and implementing agencies. The political adoption decision was motivated by
legitimacy and normative pressures by the accounting profession. The approach was
primarily ‘top-down’, with government-wide accrual financial statements adopted,
but many departments continued using cash accounting for decision making. It
followed primarily the Anglo-Saxon model, but with some European undertones.
Benefits were scarce and difficult to attribute to accrual accounting. The ongoing
impasse regarding accrual departmental financial statements and budgets suggests
self-interested behaviours by administrators and politicians.

Keywords: accrual accounting, accrual budgeting, central government, Canada

INTRODUCTION

In recent years, public-sector organizations have increasingly adopted accrual

accounting practices to replace their previous cash or modified cash accounting
systems (Ellwood, 2003; and Hodges and Mellett, 2003). Governments in New
Zealand, Australia, and the United Kingdom (UK) have been early adopters

∗ The first author is Associate Professor of Accounting at Sprott School of Business,

Carleton University, Ottawa, Canada. The second author is a research associate at
Carleton University. Previous versions of this paper were presented at the 6th International
Conference on Accounting, Auditing and Management in Public Sector Reforms, Copenhagen,
September 1–3, 2010 and at the International Academy of Business and Public Administration
Disciplines (IABPAD) Conference, New Orleans, LA, October 21–24, 2010. The authors
thank the editor and two anonymous referees for their invaluable recommendations for
strengthening the manuscript.

Address for correspondence: Raili Pollanen, Associate Professor, Accounting, Sprott School
of Business, Carleton University, 1125 Colonel By Drive, Ottawa, ON, K1S 5B6 Canada.
e-mail: Raili_Pollanen@carleton.ca


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360 POLLANEN AND LOISELLE-LAPOINTE

(Pallot and Ball, 1997). Although not without some opposition and challenges,
the continuing adoption trend has been considered ‘self-evident’ (Lapsley et al.,
2009) and demonstrated by subsequent adoptions in many other Organization
for Economic Co-operation and Development (OECD) countries (Blondal, 2003).
The decision to adopt has often been justified based on managerial benefits,
in line with private-sector style New Public Management (NPM) practices,
for example, improved efficiency and resource management (Hyndman and
Connolly, 2011; Blondal, 2003; Ellwood, 2003; Barton, 2002; Mellor, 1996; Pallot
and Ball, 1996 and 1997; and Likierman et al., 1995). However, adoption
decisions are typically more complicated and influenced by political forces and a
need for legitimacy (Arnaboldi and Lapsley, 2009; Pina et al., 2009; and Lapsley,
1999).
It is still not well understood why some countries decided to adopt early,
while others are late adopters or remain non-adopters. For example, Pina and
Torres (2003) and Pina et al. (2009) portrayed an adoption trend spreading from
Anglo-Saxon to Nordic to Continental European countries but also noted several
exceptions. In addition, adoption approaches vary even in countries within these
clusters (Blondal, 2003; and Carlin, 2005), and the benefits of adoptions remain
elusive (Lapsley et al. 2009; and Connolly and Hyndman, 2006). Moreover,
Pollitt and Bouckaert (2004) emphasized the importance of socio-economic and
political conditions, along with institutional and administrative structures, in
adopting public management reforms. Therefore, it is important to study accrual
accounting adoptions in different countries and contexts. This exploratory
study investigates the rationale, approaches, and impact of accrual accounting
adoption by the Government of Canada. As a late Anglo-Saxon adopter, the
Government announced its decision to adopt accrual accounting as part of the
1995 budget process, but it took seven years to produce the first government-
wide accrual financial statements. The study addresses the following research
questions:
1. What are the main rationale and influences for the decision to adopt
accrual accounting by the Government of Canada?
2. What are the approaches and processes used to implement accrual
accounting by the Government of Canada?
3. What is the impact of accrual accounting adoption by the Government
of Canada, that is, its benefits and shortcomings?
ACCRUAL ACCOUNTING DEVELOPMENTS, FOUNDATIONS, AND CONTEXT

Developments and Debates

Historically, most sovereign governments have used cash accounting, but
subsequently supplemented or replaced it by accrual accounting (Ellwood, 2003;
and Hodges and Mellett, 2003). A widespread shift started in Anglo-Saxon
countries in the 1980s, with New Zealand being the first major country to


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adopt accrual accounting in its central government (Pallot and Ball, 1997),
although much earlier introductions of some ‘commercial’ accrual accounting
principles and double-entry bookkeeping have also been documented (Anessi-
Pessina and Steccolini, 2007). In Australia, the state of New South Wales was
the first to produce government-wide accrual financial reports in 1992, with
the Commonwealth federal government following in the mid-1990s (Carlin,
2005; and Guthrie, 1998). By that time, the UK central government had
also introduced accrual accounting as part of a wider resource accounting
and budgeting initiative (Hepworth, 2002; and Connolly and Hyndman, 2006).
Subsequently, this trend spread into other OECD countries, with approximately
one half of them having adopted some degree of accrual accounting for financial
reporting, and to a lesser degree for budgeting, at either central and/or local
government levels (Blondal, 2003). The approach used in the Anglo-Saxon
countries has been largely administrative or ‘top-down’, whereas some European
countries, particularly the Nordic countries, have used a more consultative
‘bottom-up’ approach (Pollitt and Bouckaert, 2004).
Accrual accounting adoptions have commonly been justified by managerialism
and economic rationalism impeded in the NPM (Caperchione, 2006; Lapsley,
1999; Hood, 1995; and Broadbent and Guthrie, 1992). The NPM entails the
adoption of private-sector management practices to improve the efficiency
and effectiveness of, and the accountability for, public services. The NPM
replaced so-called ‘progressive’ models of public accountability, which focused
on controlling inherent corruption in public organizations through elaborate
rules and procedures (Gruening, 2001; and Hood, 1995). The NPM emphasizes
accountability for results instead of processes (Hood, 1995). Accrual accounting
has commonly been viewed as a key tool of NPM (Pollitt and Bouckaert,
2004; Christensen, 2005; and Hood, 1995). It has been argued to result in the
‘accountingization’ of the public sector (Hood, 1995), the greater visibility and
influence of government accounting (Pina et al., 2009), and the elevated role
and status of public-sector accountants and auditors (Caperchione, 2006).
Regardless of the widespread adoption trend, which Lapsley et al. (2009)
considered ‘self-evident’, the appropriateness of accrual accounting for public
organizations has been debated extensively. It has been criticized for being
adopted for only legitimacy reasons, that is, to provide an appearance of
accountability, without producing substantial benefits (Lapsley et al., 2009;
Arnaboldi and Lapsley, 2009; and Pina et al., 2009). Other arguments against
the usefulness of accrual accounting in the public sector include: lack of
profit goals (irrelevant measure), overstated expected benefits (not justify
costs), potential for manipulation (less transparency), narrow focus on costs
(ignores other important performance aspects), and difficulty in valuing unique
infrastructure assets (less accuracy) (Hyndman and Connolly, 2011; Connolly
and Hyndman, 2006; Carlin, 2005 and 2006; Mellett, 2002; Christensen, 2002;
Guthrie, 1998; and Pendlebury and Karbhari, 1998). More generally, Graham
(2007) argued that politics supersedes rational accounting in the public sector,


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that is, political forces seriously limit the effectiveness of accounting as an

accountability mechanism.

Theoretical Foundations
The rationale for accrual accounting adoption has often been based on institu-
tional theory and rational public choice theory (Pina et al., 2009; Marti, 2010;
and Christensen, 2005). Institutional theory posits that organizations adopt
structures and practices in response to actual or anticipated external changes.
It can explain external pressures as coercive (e.g., by legislators/regulators),
normative (e.g., by professional institutes/agencies), and mimetic (e.g., by other
governments/agencies) (DiMaggio and Powell, 1983). These forces can enhance
the homogeneity of accounting practices across organizations and contribute
to institutional isomorphism (Baker and Rennie, 2006). Pollitt and Bouckaert
(2004) considered institutional theory the most appropriate for explaining
public-sector management reforms, and Christensen (2005) used institutional
theory to explain how consultants were very influential in accrual accounting
adoptions. On the other hand, a key assumption in public choice theory is
that politicians and administrators behave rationally in their own self-interest,
instead of public interest, and that NPM practices can control such tendencies
(Pallot, 2002; Pina et al. 2009; and Marti, 2010). Pina et al. (2009) argued
that public choice theory could be more relevant for the NPM countries and
institutional theory for Continental European countries.
More generally, the adoption and implementation of accrual accounting
can also be viewed within the broader context of organizational change.1
Hinings and Greenwood (1988) proposed several tracks or paths to successful
organizational transformations, in which existing organizational structures and
systems are replaced by new ones. A successful transformation was seen as
one with a high degree of coherence between organizational structures and
the set of underlying ideas, values, and beliefs. However, they argued that
these tracks may not be linear, but they can involve oscillating and delayed
transformations, as well as, result in aborted and unresolved transformation
attempts and inertia. For example, transformation efforts could reach a
stalemate or be discontinued for political reasons. Subsequently, Cooper et al.
(1996) distinguished between transformation and sedimentation. As compared
to transformation, sedimentation represents an incremental approach, with
changes embedded in organizational context and super-imposed or layered
on the existing structures and systems. Furthermore, Broadbent and Guthrie
(1992) questioned the ability of traditional technical accounting to achieve major
change in the public sector, as has been promoted in the NPM literature, and
argued for an ‘alternative’ non-technical approach emphasizing organizational
context. Therefore, the degree of change achieved by the NPM may, at best, be
only minor and sedimentary.


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Canadian Context
As a country steeped in the Anglo-Saxon traditions, Canada could reasonably be
expected to have embraced the NPM, including accrual accounting, along with
the other early Anglo-Saxon adopters. On the contrary, Canadian jurisdictions
have been slow to adopt such practices (Pollanen and Pollanen, 2009; and
Carlin, 2005). Pollitt and Bouckaert (2004, p. 98) did not include Canada in
the NPM group consisting of the four other Anglo-Saxon countries (UK, US,
Australia, and New Zealand), but stated that ‘during the 1980s, it shared
much of the marketizing rhetoric of Thatcher and Regan, but did not in
fact go far in implementing those ideas’. Neither were Canadian practices
considered to be very close to those in Continental European countries (neither
Nordic nor Central European countries), which in general emphasize the
greater role of the state in society than the NPM countries. The Nordic
countries have been active and steady modernizers, concerned with meeting
citizens’ needs, and have implemented selected NPM practices within their
decentralized egalitarian socio-political structures (Pina et al., 2009; and Pollitt
and Bouckaert, 2004). On the other hand, the Central European countries are
generally governed by more bureaucratic and hierarchical public administration
grounded in administrative law, which results in slower reforms and greater
resistance to NPM practices. As a relatively late and socially conscious adopter of
selected NPM practices, Canada exhibits some characteristics of all three major
groups.2
Financial management reform efforts in the Government of Canada have
a lengthy and convoluted history (Baker and Rennie, 2006). The Royal
Commission on Government Organization (1962) recommended improvements
to the economy and efficiency of public services, and the Royal Commission on
Financial Management and Accountability (1979) sought the ‘best approach’ to
financial management. Although both commissions discussed accrual account-
ing, they did not explicitly recommend it. It was not until during the 1995
federal budget process that the Government of Canada announced its intention
to move to full accrual accounting for budgeting and financial accounting,
implicitly framed under its ‘better management, constant control’ rhetoric
(Canada, Department of Finance, 1995a). Administratively, accrual accounting
implementation became part of the broader Financial Information Strategy
(FIS) initiative (Hickling Corporation, 1997), which, in turn, aimed to address
selected recommendations of the Independent Review Panel on Modernization of
Comptrollership in the Government of Canada (1997). The Canadian approach
is similar to that used in Ireland, where accrual accounting was introduced as
part of strategic revitalization of the public service (Hyndman and Connolly,
2011).
Unlike for private-sector organizations in Canada, the Canadian Institute of
Chartered Accountants (CICA) can only recommend, but not mandate, accounting
standards for the Canadian federal and provincial governments. The CICA,


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through its Public Sector Accounting Board (PSAB), sets accounting standards
for Canadian public organizations in the Public Sector Accounting (PSA) Handbook
(Canadian Institute of Chartered Accountants, 2010b).3 Prior to implementing
accrual accounting, the Government of Canada, like many other government
organizations, used modified accrual accounting for financial reporting, with
most of the expenditures being recognized on the accrual basis, that is, when
liabilities occurred. However, capital assets were recorded on the cash basis, with
the full amount expensed at the time of purchase. Most revenues, except for
taxes, were recorded on the accrual basis when earned. However, tax revenues
were recorded only when received. In addition, some contingent liabilities, such
as pension and environmental liabilities, were not fully estimated and accrued
(Canada, Department of Finance, 1995b).
It can be argued that, in a political environment, departmental administrators
are not effectively decision makers, but rather implementers of policy and
political decisions. In fact, Pollitt and Bouckaert (2004) stated that ‘public
administration’ in many countries, particularly the NPM countries, has been
replaced by ‘public management’, concerned primarily with activities, structures,
and processes, as opposed to public policy, law, and enforcement. It can be further
argued that institutional pressures can extend beyond the decision-making
phase to the implementation phase, as central agencies with administrative
and oversight functions have an authority to impose their own rules and
processes on lower-level departments. Therefore, this study investigates the
rationale for, approaches to, and impacts of accrual accounting adoption from
the perspectives of central agencies (CA) leading implementations and implementing
agencies/departments (IA) undergoing implementations.

RESEARCH METHOD

This study uses a qualitative research approach and is exploratory in its nature.
The main data collection method was in-person semi-structured interviews,
which allowed for some structure and consistency, but also flexibility to tailor
interviews to the background of the interviewees and to clarify answers (Ritchie
and Lewis, 2003; and Berg, 1998). In addition, supplementary documentary data
were collected from governmental websites, which provided background data and
verification of some interview data. Ten interviews were conducted with senior
government officials who had high-level involvement in directing and managing
implementations at central agency and departmental levels. Data were collected
in late 2007 and early 2008, five years after the first government-wide financial
statements were prepared on the full accrual basis, allowing a review of
adoption experiences with hindsight. The initial contact was made through
personal associations, and each interviewee was asked to recommend other
qualifying participants. An interview probe was developed based on existing
literature. Core questions were modelled based on those used in other studies,
for example, by Connolly and Hyndman (2006), who investigated adoption


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influences, processes, benefits, and drawbacks in the UK central government.
Specific examples, used as probes if needed, were collected from various related
studies. In order to ensure applicability to the Government of Canada, the probe
was pre-tested and slightly modified based on comments by four pre-testers,
who had expertise in qualitative research in government organizations. As an
example, the questions related to accrual accounting benefits are provided in the
Appendix.
The participants held senior positions, such as an assistant deputy minister,
associate director general, director, and chief, with an average of 17.6 years
of experience in government agencies. Most had graduate degrees and/or
accounting designations and broad experience in several departments and
positions, with an average tenure of three years in the current position. Relatively
high turnover of senior officers is typical for Canadian government agencies,
and all participants had moved to new positions.4 The participants were asked
to reflect on their experiences in the agencies in which they were employed at
the time of accrual accounting implementation. Five respondents (CA1 to CA5)
represented central agencies and five others (IA1 to IA5) implementing agencies.
In order to protect individual and departmental anonymity, the responses cannot
be attributed to individuals in specific agencies, and only whether responses
reflect central or implementing agency perspectives is reported. The agencies
provide a wide range of services to businesses, other government agencies, and
the general public. The interviews were recorded, transcribed, and coded using
open coding (NVivo 2.0).

EXPLORATORY CASE EVIDENCE IN THE GOVERNMENT OF CANADA

Adoption Rationale and Influences

It is apparent from the comments provided by the participants that the final
decision to adopt accrual accounting in the Government of Canada came rather
suddenly and was made at the highest political level, although there was a
lengthy history of prior financial reform efforts and pressures. CA2 expressed
strong views on the political aspects of the decision, as follows:
Decisions are made effectively by the Prime Minister and the Minister of Finance,
and that [sic] becomes eventually a decision ratified by Cabinet . . . The Department
of Finance comes up with an estimate of affordability based on whatever the fiscal
policy of the government is . . . It is rational in political terms, but it is not rational
decision making.
The cabinet policy committees are nothing more than a bunch of focus groups for the
Prime Minister; all they do is generate ideas and then the Prime Minister picks the
ideas he wants with the Minister of Finance . . .

External pressures, which could have influenced the final adoption decision,
however, had previously been exerted by several sources, as proposed by Baker


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and Rennie (2006), including peers and the accounting profession. As explained
by CA1:
There was a vested interest in Canada being kind of a world leader, recognition that
the rest of the world [was] heading towards private-sector accounting standards and
that the Government should follow . . .
There was pressure at the time from the Auditor General [AG] . . . When the AG says
something people listen . . . Public accounts committee was pushing us in that direction
as well . . . PSAB was [also] moving toward accrual accounting . . . We wanted a clean
audit opinion.
The first statement, which was also echoed by other central agency participants,
shows the influence of peers, that is, the Government was mimicking the
presumably better accounting practices of other jurisdictions. It reflects a quest
for recognition and legitimacy, which has also been observed in other adopting
countries (Arnaboldi and Lapsley, 2009; Pina et al., 2009; and Lapsley, 1999).
The second statement acknowledges the Office of Auditor General (OAG)
and the PSAB as important sources of legitimacy, regardless of the fact that
they can only recommend — not mandate or enforce — accounting standards
for the Government of Canada. However, the influence of the earlier financial
management reform commissions on the final decision is unclear (Baker and
Rennie, 2006), and the intermittent or waning interest is also consistent with
the Irish experience (Hyndman and Connolly, 2011). As expressed by CA3 and
CA4, respectively:
For a variety of reasons [the accrual accounting issue] kind of died in the early 90s,
and it was reborn in 95 . . . It was a policy decision to do this, and it was imposed on
departments.
It took a long time to convince the Government internally that the accrual accounting
was necessary. There was major suspicion from parliamentarians . . . at one point they
thought it was smoke and mirrors.
Some central agency participants expressed obvious pride in this initiative and
the approach adopted.5 A hidden message in the following comments by CA1
appears to be one-upmanship, that is, since the Government is late adopting
accrual accounting, it should do things differently and better than prior adopters.
We went the opposite route of the US and the UK in that we went for the audit opinion
of the consolidated financial statements first. That has advantages, you can get there
quicker, because you are dealing with huge materiality levels. Other countries went
for audited financial statements at the departments first.
Look at us, we are now moving to audited departmental financials . . . US and UK
are kind of there already, [but] they still are not getting clean opinions on their
consolidated statements for various reasons.
In this respect, the Canadian adoption is closer to the model used in New
Zealand and Australia, where accrual government-wide financial statements
were adopted in the central governments early. In comparison, the trend in many
European countries has been more ad hoc adoptions in central agencies and/or


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local governments (Pina et al. 2009; van der Hoek, 2005; Paulsson, 2006; and
Vinnari and Nasi, 2008). In retrospect, the second comment by CA1, however,
was highly optimistic and premature at the time, as, a decade later, departmental
financial statements still remain on the former cash or modified cash basis and
are referred to colloquially as ‘unauditable’. This finding is similar to the Irish
outcome reported by Hyndman and Connolly (2011). As noted by Pollitt and
Bouckaert (2004), it is common for reforms to get halted due to changes in
government and new pressures. The Canadian accrual accounting initiative was
adopted and implemented during a long-term liberal party rule, whereas the
ruling conservative party since 2006 has focused more on accountability through
restructuring than administrative reforms.
As in many other countries, the accrual accounting adoption decision in
the Government of Canada was part of wider public management reforms
(Hyndman and Connolly, 2011; Paulsson, 2006; van der Hoek, 2005; and Guthrie,
1998), specifically the FIS.6 In principle, it is consistent with the Anglo-Saxon
top-down model (Pollitt and Bouckaert, 2004), whereby decisions are made at
the highest political levels. However, being approved as one small administrative
budget measure among many, the adoption decision was much less visible and
debated than those in other Anglo-Saxon countries, particularly in New Zealand
and Australia, with stronger legislative mandates (Carlin, 2005; Pallot, 2002;
and Christensen, 2002). Furthermore, the repeated recommendations by the
OAG and the PSAB carried significant weight in making the final decision. As
Blondal (2003) noted, the Ministers hardly ever overturn the recommendations
of professional public-sector accounting boards.

Implementation Approach and Processes

The implementation approach used relied heavily on consultants, confirming
findings of other studies (Connolly and Hyndman, 2006; and Christensen, 2005).
Considerable lack of accrual accounting and systems expertise, along with a
high turnover of staff with the requisite skills, resulted in the need for outside
consultants. For example, CA4 stated: ‘We hired a herd of consultants . . . We
got taken to the cleaners by consultants’, indicating self-interested behaviours
by consultants. Ironically, some skilled government employees also resigned
and returned as consultants. This behaviour applied particularly to employees
with expertise in SAP, which is an enterprise information system used by some
departments. CA4 and CA2 explained, respectively:
It is not acceptable to have the kind of volume of people with those kinds of skill sets
in the government. It is expensive to train them and, once they are trained, they run
off for bigger money in consulting.
The SAP departments . . . relied a lot on consultants, but that was because SAP
consultants can make a lot more as consultants than as employees. So, there was
a lot of stress looking for competent people to do implementation system-related
work.


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Typically only a few large consulting firms were involved in these implemen-
tations, as only a few firms met the government tendering specifications and had
the necessary experience with government organizations. Some firms allegedly
colluded to bid, or not to bid, on certain contracts. As expressed by CA5, ‘I
can’t prove this, but my feeling is they [consulting firms] divided up the market
among themselves and said, you know, I won’t bid on this one, if you don’t bid on
that one’. Such practices resulted in quick ‘boilerplate’ solutions being applied
to several agencies, whether or not they were the best ones for a specific agency.
CA 5 continued:

Some consulting firms were strong in that [CO or controllership module], so they would
bring that in as an approach; other ones were stronger in funds management, so they
brought that in as an approach; and we didn’t have an overall central governance to
make sure that this didn’t happen.

These practices are consistent with the profit-oriented goals of consultants and
their potential coercive influence, resulting in their taking advantage of urgent
and uncertain circumstances faced by implementing organizations (Christensen,
2005).
IA2 and IA3 agreed that the implementation of accrual accounting was
primarily centrally driven, demonstrating the top-down approach also at the
administrative level. A reduction in the number of financial systems from more
than sixty to seven was accomplished at the insistence of the central agency in
charge of implementations, which illustrates the influence of this central agency.
However, the phased approach, as opposed to the big-bang approach (Blondal,
2003), was used, allowing implementing agencies to choose one of the three
approved implementation timeframes. In addition, some large departments were
able to exert counter pressure and deter the central agency from accomplishing
more government-wide systems integration. As pointed out by CA4, ‘the impetus
was to really reduce the number of systems . . . to move to more commercial
[systems] . . . [but due to] political pressure . . . we actually qualified seven
[systems] in the end’. CA2 questioned the wisdom of such compromise decisions,
as follows:

Now there are seven [systems], and you know the big debate [was]: Should you actually
get them down to one, or should we just get them down to three now? Do you think in
the private sector any organization [of] this size would even be having this argument?
Somebody would say: here this one . . . do it and use . . . In the government system, that
is not as easy a decision to make.

Both CA2 and CA3 referred to the practices in some Canadian provinces, where
all agencies were required to implement the same technical system. These
findings indicate that information technology was central in the implementation
of accrual accounting at the Government of Canada, as had been the case in
other countries (Pollitt and Bouckaert, 2004; Blondal, 2003; Christensen, 2002;
and Guthrie, 1998).


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Under the new process, departments were required to implement a common
chart of accounts and submit monthly summary financial data (trial balances)
to the new central accounting system. However, they still also maintained their
old set of accounts for internal purposes. CA3 explained: ‘We didn’t say how
they had to do it, except that . . . this is the chart of accounts you need to
communicate with central agencies, but what you do internally is up to you’.
Departmental financial systems remained important, as financial reporting and
management decisions at the departmental level continued to be based on
cash or modified cash accounting as before. At the time, departments were
not required to produce, and many did not presumably have the capability to
produce, financial statements on the full accrual accounting basis.7 IA1 and IA4,
respectively, described these processes, as follows:
You still have two charts of accounts, the [departmental] chart of accounts which is
based on cash management, whereas the other one is on accrual accounting, so you
have to maintain both of them and to build bridges between the two.
So our system at the time keeps track of . . . both the payment budget and the
commitment budget . . . because we don’t have accrual appropriations. It added a
number of clearing control accounts that we have in place to be able to reconcile
with [the systems of] the Receiver General.

Dual systems, which often produce conflicting data, can be confusing and
discourage managers from using the accrual system. Consistent with the findings
of Christiaens and Rommel (2008), politicians and managers practically ignored
accrual information and reverted to their old systems for decision making. Dual
systems are also inefficient due to duplication, and makes one seriously question
whether benefits could outweigh costs.

Implementation Impact: Benefits and Shortcomings

Although several immediate and longer-term potential benefits were discussed
by the participants, there was little evidence that accrual accounting information
was used for decision making even several years after the initial implementation.
For implementing agencies, the production of accrual information was often
perceived as another mandated exercise with which they have to comply. As
they were not required to produce accrual financial statements or budgets,
managers did not take centrally produced accrual information seriously and
practically ignored it in their decision making (Blondal, 2003). Thus, consistent
with findings in many other governments (Hyndman and Connolly, 2011; Pina
et al. 2009: Paulsson, 2006; Christiaens and Rommel, 2008; and Blondal, 2003),
accrual information was used less and considered less useful when financial
reports and budgets were prepared using different bases of accounting. IA2
described the situation, as follows:
People are still managing their budgets on an appropriation basis and until budgets are
given to departments, or changed to accrual accounting basis . . . internal reporting will


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remain on a cash base accounting . . . Nothing has changed . . . because they [managers]
don’t see the amortization going through their budgets. They are still managing the
budget the same way they were 20 years ago.

Moreover, many benefits that were discussed related to the systems used to
implement accrual accounting instead of accrual accounting per se.
New accounting information systems allowed the automation of many
departmental accounting and reporting procedures, for example, automated
calculations of depreciation and electronic submissions of monthly depart-
mental trial balances. They also facilitated the production of real-time
information and provided more ways to view and analyze data. IA5 noted
that, ‘automating . . . improved processing cycles [and] reduced the error rate’,
and CA5 considered systems accessibility to be a major facilitator for its
use:
One of the best things we did in implementing both FIS and SAP was to put it on a
manager’s desktop . . . A manager [can] look at [his] budget and transactions.

In addition, the automatic linking of departmental and government-wide chart

of accounts on the background enabled many departmental work processes
to remain unchanged and convenient to users. CA1 and IA4 commented,
respectively:
It [new technical system] made the accounting aspect easier . . . When you’re trying to
do a cultural change to educate people about accrual accounting, you buy off-the-shelf
systems that do all the accounting for you in the background.
Behind the scenes, it [the system] automatically posts and maps every line item that we
post in our ledger [also] in the special purpose ledger which [uses] government-wide
coding . . .

These comments demonstrate that technological considerations were important

to implementers, as has also been found in other countries (Pollitt and
Bouckaert, 2004; Blondal, 2003; Christensen, 2002; and Guthrie, 1998). Once
operational after some starting pains, technical accounting systems installed
in the Government of Canada were perceived to provide some operational
benefits.
The impact of the accrual accounting itself, however, is more uncertain and
controversial. On the positive side, CA3 optimistically stated:

The objective was to prepare statements that were good quality statements, so we got
that, we are getting better costing information.

CA5 also argued that accrual financial statements could help parliamentarians,
who come from the private sector and are already familiar with accrual
accounting, understand Government finances. In addition, CA1 stated:
The government . . . has a really good credit rating because of our clean audit opinion
on an accrual basis, [but how] can you put a dollar figure on that?


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 ACCOUNTING REFORM IN THE GOVERNMENT OF CANADA 371
However, CA1 and CA5 also argued that, for many departments, except for large
departments with large amounts of capital assets, such as the Department of
National Defence (DND), accrual and cash accounting results are very close.
Small departments and those with a few capital assets do not significantly
affect government-wide financial statements either, because their expenditures
are not material for the Government as a whole. Furthermore, accruals for
some departments with little accrual accounting capability, and for some items
difficult to estimate at the departmental level, were still handled by a central
agency. CA3 explained:
It really doesn’t make a huge difference to our responsibility centre [RC] managers,
because . . . some of the employee benefits, those that would be done on an accrual
basis . . . are not farmed out to RC managers; they are managed centrally.

Regardless of such reservations, several operational benefits were also discussed:

better cost information and more timely and accurate reporting (CA5), easier
reconciliation with central accounts (IA3), better cash management (IA2), better
comparisons with other entities (IA2, IA5), and better controllership at the
local level through centralization of some mundane bookkeeping work (IA5).
However, many of these benefits are still more wishful thinking than reality, as
discussed by CA4:
I just don’t see huge amount of benefits to tell you the truth . . . Problem is we haven’t
done accrual budgeting, we have trouble matching our cycles to the accounting
transactions . . . Secondly, what is the benefit of accrual accounting to operational
managers? . . . A lot of them don’t really understand [it].
We haven’t realized those benefits . . . For instance, you should really make provisions
to replace [infrastructure assets], but we are not really doing that. We are doing
accounting, we are running through the exercises . . . The government hasn’t used that
to the advantage to understand how we maintain our asset base, and that is a serious
problem in realizing the benefits of accrual accounting . . . We produce tons of reports,
we collect tons of data, [but] we are very poor at using it [sic].

Even IA2, after discussing some benefits from the implementing agency
perspective, noted that accrual accounting was only ‘one piece of the puzzle’; it
will take time to realize benefits and ‘we are not there, yet’. More generally,
CA2 concluded:
Decision making process in a political system and a government system is much more
complex and much more contentious than the equivalent that takes place in the large
private-sector organizations, and you have to look at the fact that it is a multi-layered
process . . . A lot of the benefits are political, and how do you quantify a political benefit?

Although the Government of Canada does not require accrual departmental

budgeting, it was a ‘hot topic’ discussed by several central agency participants.
The implementing agency participants, except one, were silent on this topic,
which is understandable in light of the fact that even most departmental
financial statements are not on the accrual basis, yet. IA2, expecting better
cash control, commented:


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372 POLLANEN AND LOISELLE-LAPOINTE

Year end is always a big spending spree, because people need to get rid of their budget.
If we were on the accrual base . . . and if our appropriation were for a number of years,
I think it would allow better planning of our spending . . . better management of the
cash.

CA2 discussed accrual budgeting extensively, stating that, like for accrual
departmental financial statements, ‘accruals are not particularly relevant in
budgeting terms for most departments, [as] the federal government is not a
big capital [owner]’. Again, CA2 mentioned the capital-intensive DND being an
exception and the most advanced, while most departmental budgets remained
on the cash basis. This participant also stated that ‘individual departmental
accounts that can be audited on accrual basis’ should precede accrual budgets.
Although recognizing the bias against capital investments in cash budgets,
he/she ultimately argued against accrual budgets based on political grounds, stating:
Capital becomes much more easily affordable in an accrual-based budgeting system,
but . . . you are creating obligations that are way out beyond the political timeframe,
and that is a real danger, because it becomes politically easy to make decisions like
that, but you are binding the hands of future governments . . .

This comment illustrates an argument against accrual budgeting based on the

concept of inter-generational inequity, whereby the burden of current decisions
is shifted to future generations (Robinson, 1998; and Vinnari and Nasi, 2008).
Furthermore, this participant (CA2), who held an influential senior position at
the time, admitted delaying and faking a study on accrual budgeting promoted
by the OAG, stating:
When I was in the job, we were moving very quickly, so it looked quite frankly as [if]
I was tending to blow smoke at parliamentary committees by saying we are studying
this, and their saying, yeah, but you have been saying this for the last three years; and
we say, yeah, we’re still studying, which is true. But I had for two years one person
working on this, and that was all . . .

As also observed by ter Bogt and van Helden (2000, p. 276), this comment
demonstrates ‘little real commitment to formal goals and the intended changes’,
as well as political games being played (Graham, 2007). If it is representative
of the attitudes of senior administrators in the Government of Canada, it is not
surprising that practically no progress has been made on accrual departmental
budgeting.

SUMMARY AND CONCLUSION

The decision to adopt accrual accounting in the Government of Canada was

motivated by a need for recognition and legitimacy (Arnaboldi and Lapsley,
2009; and Pina et al., 2009), with the Government clearly emulating accrual
accounting adoptions by other Anglo-Saxon countries. It was also influenced by
long-term normative pressures by the PSAB and the OAG (Baker and Rennie,
2006). The implementation approach used was primarily, but not exclusively,


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 ACCOUNTING REFORM IN THE GOVERNMENT OF CANADA 373

top-down (Pollitt and Bouckaert, 2004). Overall, the Canadian approach is

characterized by the weaker use of legislative measures, greater professional
influence, later adoption, and greater number of compromises than the typical
Anglo-Saxon approach. These characteristics situate Canada best as a medium-
intensity adopter, along with Ireland (Hyndman and Connolly, 2011), and also
bring it a small step closer to the more consultative Nordic approach (Pollitt
and Bouckaert, 2004; and Pina et al., 2009).
However, Canadian federal politicians seem to have lost interest in fully
completing and advancing the accrual accounting reform commenced. The
lack of progress could be attributable to changes in government and party
politics, specifically the unwillingness of the ruling conservative government
to further such administrative reforms started by several preceding liberal
governments. Consistent with the notions of public choice theory, politicians
can be seen pursuing their own self-interests, instead of the public interest.
The same conclusion also applies to a degree at the administrative level, with
the accrual accounting adoption having strengthened the roles of some central
oversight agencies and professionals, including accountants and consultants.
There are continuing efforts by these parties to protect their self-interests.
The result is a conflict between central administrators and politicians, with the
former supporting the adoption of accrual departmental financial statements
and budgets in the future and the latter ignoring the issue. Departmental
managers, on the other hand, are quite happy with their systems — their motto
could be ‘don’t fix what is not broken’.
The end result is that practically no progress has been made during the
past decade towards accrual departmental financial statements and budgets,
and many departments ignore accrual information and continue using their
old systems and practices for decision making. These findings are similar to
Hyndman and Connolly’s (2011) conclusions for Ireland. A common view, even
among some Canadian central agency participants, is that accrual financial
reporting and budgeting are not relevant to many departments, because they
are not capital intensive. Consequently, accrual accounting information is not
being used effectively, if at all in some cases, and accrual departmental financial
statements and budgets remain as controversial as ever (Blondal, 2003; van
der Hoek, 2005; and Carlin, 2006). The halted progress signifies an incomplete
transformation, termed an aborted excursion by Hinings and Greenwood (1988),
in which at least a partial de-coupling of systems and the underlying ideas, values,
and beliefs has occurred for political reasons.
This study contributes to the literature by revealing a glimpse into the
perceived benefits and shortcomings of accrual accounting adoption in the
Government of Canada from the perspectives of central and implementing
agencies. However, the study is somewhat limited by its exploratory nature and
a relatively small sample. Further research could focus on a more comprehensive
assessment of the longer-term impact of accrual accounting and related financial
management reforms in Canada and comparisons across jurisdictions.


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374 POLLANEN AND LOISELLE-LAPOINTE

APPENDIX

Excerpt from Interview Probe

Accrual Accounting Benefits

The next few questions deal with the benefits that have resulted, or are expected to
result, from accrual accounting implementation in your department.

1. What were the expected benefits of accrual accounting implementation in your

department? Examples of expected benefits include, but are not limited to:
a) Operational efficiency
b) Systems efficiency
c) Organizational performance
d) Behavioural outcomes
e) Stakeholder satisfaction
f) Comparability of information
g) Improved decision making
h) Management of capital assets
i) Compliance with standards
j) Accountability
k) Integration of financial and non-financial information
l) Improved management control systems

2. How did/do actual benefits compare to the expected benefits you mentioned?
a) Which actual benefits exceeded expected benefits?
b) Which actual benefits matched expected benefits?
c) Which actual benefits ‘fell short’ of expected benefits?

3. Which of the previously mentioned benefits can be primarily attributed to the

adoption of accrual accounting in your department?

4. Which of the previously mentioned benefits primarily stem from larger change
initiatives that have occurred, such as the Financial Information Strategy?

5. What proportion of the total overall benefits achieved would you attribute to
implementation of accrual accounting?

NOTES
1 The authors acknowledge the contribution of an anonymous referee who pointed out this
relationship.
2 Canada (like Australia, the US, Germany and Belgium) is a federal state with constitutional
powers devolved to provinces, and further to local governments, but the Nordic and other
European countries (also New Zealand and the UK) are unitary states with only central and
local levels (Pollitt and Bouckaert, 2004).
3 ‘Government organizations’ include: federal, provincial, territorial, and local governments;
government-controlled organizations/agencies; government partnerships; and school boards.
‘Government business enterprises’ follow the CICA Handbook — Accounting (Canadian Institute
of Chartered Accountants, 2010a). ‘Other government organizations’ can choose either the
PSA Handbook or the CICA Handbook — Accounting.
4 A few other potentially qualified participants were no longer employed by the Government.
The ten participants represented all qualified participants who could be tracked. It is possible


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 ACCOUNTING REFORM IN THE GOVERNMENT OF CANADA 375
that some were missed, but reasonable efforts were made to locate the key players who were
involved in accrual accounting adoption and implementation and who were still employed by
the Government.
5 Only central participants commented on the political aspects of the adoption decision. When
implementing agency participants referred to decision making, they meant decisions by
central agencies that affected them. It is understandable, as the former are closer to the
political process but the latter are quite removed from politics.
6 In addition to accrual accounting strategy, the FIS also comprises information systems and
people management strategies.
7 These findings still hold, as at the time of this writing.

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