The impact of the political system on the adoption of IPSAS by international public organizations ABSTRACT: The main purpose of this research is to examine the nature of the relationship that may exist between the political system and the adoption of the International Public Sector Accounting Standards (IPSAS) by public institutions. We will start, in the first section, by presenting IPSAS and their adoption by, both, developed and developing countries. In the second section, we will review the main factors contributing in accounting’s development and more specifically international accounting harmonization. Then, we will try to present theoretically the relationship between the political environment and the accounting policy development at both national and international levels. In the third section, we have chosen to test empirically the relationship that may exist between the adoption of IPSAS and the political systems. Which we have defined through three main indicators: corruption, freedom and democracy. Finally, we will conclude demonstrating that only the stage of democracy could explain the adoption of IPSAS by public international bodies. KEY WORDS: International accounting harmonization, New public management, Public sector, IPSAS.
INTRODUCTION: The international accounting harmonization can be defined as the standardization of the accounting language to eliminate differences between accounting systems varying from one country to another. Since 1960, researchers have been concerned with the international accounting harmonization and have conducted studies to explain these differences and their influence on this process. Indeed, knowledge of accounting environment factors and their evolution is capital for a better understanding of the process of international accounting harmonization. Actually, Meek and Saudagaran (1990) believe that international accounting harmonization may avoid conflicts by reconciling different perspectives while keeping accounting choices within standards. Furthermore, Nobes and Parker (1981, p329) define international accounting harmonization as "a process to increase the compatibility of accounting practices, with a limitation of their level of variability". Moreover, according to Barbu (2005), the objective of international accounting harmonization is to reduce the diversity of accounting practices to make them comparable and has the ultimate goal of adopting a single accounting rule (International Accounting Standards IASB) whose application will be universal. On the other hand, there has been a migration to international standardization
in the public sector in the late 1990s. This standardization process has been led by the International Federation of Accountants (IFAC), a non-governmental organization. Previously, governments had no accounting standards in accordance with international norms, they only regulated accounting systems, financial and budgetary information based on their own benchmarks. This led to a diversification of accounting systems and financial reporting (Oulasvirta, 2013). Since then, the situation has changed significantly; indeed, thoughts of "New Public Management" have pushed governments to take into consideration an accounting adjustment and also to make reports on financial performance (Oulasvirta, 2013). In addition, since 2000, the IPSASB has published a set of international standards, based on accrual accounting, for all public sector entities, both national central governments and local authorities. Moreover, public accounting is challenging in the relationship between two major players: the government and citizens. The government must provide citizens with information enabling them to make judgments on the quality of management of the state in a way to legitimize its activity and to bring elements of nature to inspire confidence. In addition, the duty of being accountable to citizens and taxpayers in democratic countries requires financial transparency based on reliability of the accounts, which must be accurate and give a fair view of the assets and financial position of the State "(Djamel Khouatra, 2009).
In this context, International standards in the public sector can be defined as: A single set of accounting standards recognized worldwide, serving the internationalization of capital markets and the information needs of donors (Camfferman and Zeff 2007; Meeks & Swann, 2009). Hence, the adoption of IPSAS by states allows international donors such as the World Bank and the IMF to assess the financial statements published by the countries. Yet, this implementation takes place in an institutional context that resists to changes in government culture. Actually, Oulasvirta (2013) suggests that if the institutionalization forces are strong enough, then, they would manage to change, in a particular context, the prevailing accounting culture in a country. In other words, if the culture of the dubious national accounts is deeply rooted, and institutional rules are already entered in the sediment phase, it can lead to resistance that slows or prevents the full deinstitutionalization of the dominant culture and the institutionalization of the new transnational culture represented by IPSAS (Tolbert and Zucker, 1996). It is in this context that our problem arises: indeed, the main objective of our work is to examine the impact of the political system on adopting IPSAS by international agencies. The components of such political system could be defined as follows: - the total level of freedom measured by the index of freedom (Freedom House) - the level of corruption measured by the index of corruption perceptions (Transparency International)
-
The democratic development measured by the index of democracy. (The Economist Group)
have an impact on their choice of accounting practices (Bergevärn et al., 1995; Carpenter and Feroz, 2001)
Specifically, reflections conducted in this research aim to provide some answers to the following central question: What is the impact of the total level of freedom, the level of corruption, and the democratic development of any political system on adopting IPSAS by public international bodies?
Davis and North (1971) distinguish between institutional environment and institutional arrangements. In other words, while transactional activity of the actors is defined by game rules, namely political, social and legal rules, arrangements refer to uses of these rules by the actors (Menard, 2003).
After positioning our research work in its theoretical framework, we will present our study in three sections: The first section is dedicated to the presentation of public sector international standards and their adoption by some developed and developing countries. The second section begins with a definition of international accounting harmonization, and then overviews the main factors that have been identified in the literature as being able to explain the international accounting harmonization. This section ends with a presentation of the relationship between the political factor and the development of accounting at the national and the international level. In the third section, we try to empirically investigate the relationship between the political system and the adoption of International Standards (IPSAS).
THEORETICAL FRAMEWORK Our study is based on the so-called "new institutional theory" or "new institutionalism" since this theory helps to understand how and why organizations interact and how this interaction could
Menard (2003) suggests a definition which aims to explain the neo-institutional research program; by institution, the author intends: a set of rules, durable, stable, abstract and impersonal, crystallized in laws, traditions or customs, put and implemented, by the consent and / or the constraint of organization’s transaction modes. Indeed, the institutional systems are open systems that are related to each other by cross-border interaction between different groups of actors. The process of change in accounting cultures can be explained as the outcome of complex processes and combined institutionalization, deinstitutionalization and reinstitutionalization (Djelic and Quack, 2008). In case studies, institutional theory is generally an exploratory and viable foundation in a context where there is a multitude of institutional pressures on accounting choices (Collin et al., 2009). Thus, our study focuses on one of the factors that could explain the adoption or non-adoption of IPSAS by a country: neoinstitutional theory provides the appropriate theoretical framework for this research.
The national accounting standard-setters and other actors influencing government accounting are members of an institution that works with transnational communities such as IFAC and IPSASB. Many studies have been conducted in this context and demonstrate how the quest for legitimacy requires organizations to interact with their institutional environment and comply with external requirements (Adhikari and Mellemvik 2010). We quote as an example the studies of (DiMaggio & Powell, 1983; Scott, 1987; Oliver, 1991; Carruthers, 1995; Meyer and Rowan, 1977; Carpenter and Feroz, 2001). Therefore, studying of the factors explaining the transition from one country to the International Public Sector Standards refers to the neo-institutional theory and its mechanisms. In the next section, we will present the public sector international standards and their adoption by the developed and developing countries. SECTION 1: THE IPSAS AND THEIR ADOPTION BY THE INTERNATIONAL PUBLIC INSTITUTIONS In the late 1990s, there has been a migration to international standardization in the public sector. Recently, IPSAS have become the new accounting standards for the public sector designed to standardize the accounting systems nationally and internationally. These standards are likely to be applied in all public entities around the world: states and governments, public agencies and services, municipalities, universities,
hospitals, primary schools and other public organizations. The purpose of the International Public Sector Accounting Standards Board (IPSASB) is to serve the public interest by developing high quality accounting standards for use by public sector entities around the world in the preparation of financial statements for general use (International Federation of Accountants (IFAC), 2008). Indeed, by the end of July 2012, the IPSASB has published 32 standards based on accrual accounting for governments. Moreover, The IPSASB has recognized, when producing these standards has begun, that the aim of financial reporting is the same for the public sector and the private sector (Oulasvirta, 2013). Therefore, the IPSASB has selected IAS / IFRS as the basis for public sector standards (Christiaens et al., 2010). These standards are developed separately by an independent body, dedicated for the public sector, based on IAS / IFRS standards and addressing issues, specific to the public sector that are not addressed by IFRS. According to Chan (2005), the International Public Sector Accounting Standards represent a new type of government accounting that challenges the traditional superiority of the budget in Government Accounting. This first section will be devoted first to the presentation of international standards in the public sector, then, in a second part, to present the adoption of IPSAS by the developed countries, finally, to present the
adoption of countries.
IPSAS
by
developing
In fact, the process of adopting a uniform set of accounting standards is considered as an important aspect of the globalization of the economy (Herz, 2007).
to improve the quality of financial reporting, the efficiency and the effectiveness of the public sector. This evokes a large debate on the harmonization of the public sector and its convergence with financial reporting standards of the private sector (Roje et al., 2010).
For many years, accounting professionals, regulators, financial analysts and investors have demanded efforts to harmonize accounting standards between countries (Roje et al., 2008).
In addition, the implementation of IPSAS has spread around the world; in fact, developed and developing countries are gradually migrating to international standardization in the public sector.
This could be introduced by reforms of the public sector that refers, according to Roje et al. (2010), to all financial and administrative reforms; this has been subject to many scientific and professional articles.
Moreover, in the common law countries, the law and budgetary systems are not as rigid as in the civil law countries. Therefore, it was easier for them to change the accounting system and introduce full accrual accounting under IPSAS (Roje et al., 2010).
The result of these reform processes is a well known concept in the literature under the name of New Public Management (NPM), which involves the management based on the use of economic regularities and principles of market efficiency (Azuma, 2002). The wave of new public management (New Public Management) led to major improvements in the public sector over the past three decades. The accounting change that focuses on the adoption of accrual accounting has been central to the reform of the public sector, particularly in Western countries (Christiaens and Peteghem, 2007; Guthrie et al., 1998; Guthrie et al. 1999; Ellwood and Newberry, 2007; Mellett and Ryan, 2008; Lapsley et al, 2009). Indeed, the need for high quality standards suggests that the public and private sectors must not be managed differently, in order
According to Christensen (2002), the accrual accounting was among the most significant accounting techniques that have dominated the reform of public sector management. The challenges of accounting and management of public organizations and their components involved a continuous introduction of innovation and reforms in accordance with the requirements of the new international trends. However, unlike the experienced coherence in the private sector, where the application of the accrual has been consistent, this base is unequally applied in public accounting. In fact, we have found a gradual transition from a cash basis to accrual accounting, depending on the level of development of national accounting systems (Roje et al., 2008).
On the other hand, The World Bank and the IMF encourage countries, in which they operate, to adopt IPSAS in accordance with a public finance reform plan.
Indeed, the creation and preservation of these audit traces could discourage corruption and violations of tax liability elements (Chan, 2005).
Many researchers have pointed out the dominant role and influence of international financial institutions, including the World Bank and the IMF, and this role is to facilitate the accounting reforms in developing countries (Uddin and Hopper, 2001, 2003; Mir & Rahaman, 2005; Neu et al., 2006; Alawattage et al, 2007).
In particular, financial accounting of the government is the process of identification, recognition and measurement of the impact of these transactions led by the government (Chan, 2005).
These studies have attempted to demonstrate how the accounting change has become an important part of the conditions of the credit agreement for developing countries (Adhikari and Mellemvik 2010). Even if there has been controversy in the literature about the introduction of management techniques and private sector accounting in the public sector, IPSAS gained global acceptance (Roje et al., 2010). The controversy arises from the nonfinancial public sector resources’ nature and the non-profit purpose of governments. Democracy and the market economy invade the planet over the last two decades, encouraging government accountability and transparency. These two values are the foundation of the practice of accounting and auditing in the public sector (Chan, 2005). Moreover, according to Chan (2005), accounting can still contribute to the financial accountability of government by establishing financial reports of public money received and spent.
As such, the information helps the government manage its financial affairs. Thus, accounting has become both an output and an implementation mechanism of democratic accountability in the political system and economic reciprocity in market economies. These are the values defended by the Western democracies, and by financial institutions (Chan, 2005). International research has shown that the developed countries have made significant progress regarding the implementation of accrual accounting in the public sector. Some of them have already implemented accrual accounting for budgeting and preparation of consolidated reports of the State (eg New Zealand, Australia, Canada and the United States) (Roje, 2007). The introduction of accrual accounting was followed by a massive adoption of IPSAS. In order to improve the consistency of financial information, the IPSASB launched in 1996 its IPSAS development program, addressing the need of highquality international standards. This program focuses on full accrual accounting and meets the user requirements of having prepared reports based on treasury (Roje et al 2010).
Although IPSAS are not directly and necessarily adopted by all governments, they were imposed by other means. For example, the European Commission used IPSAS as a basis for the development of accounting policies in a transition towards the goal of full accrual accounting in 2005. For these countries, Australia, Canada, the United Kingdom and New Zealand, the implementation of standards has been widely compatible with almost all IPSAS requirements (International Federation of Accountants IFAC-PSC 2003 ), while other countries like the United Arab Emirates, the Netherlands, Malta, Israel etc., have intended to move to accrual accounting and expressed their willingness to consult IPSAS (Grossi , 2006). Indeed, in order to encourage and ensure international transparency of national economy and public finance, it is recommended to move towards improved accounting standards in the public sector. In addition, a set of councils and both national and international accounting associations worldwide have been working on the preparation and development of accounting standards in the public sector (Roje et al 2010). By reference to the findings of the international comparative study conducted by Brusca and Candor (2002), and after taking into account the study of Roje (2007), we may conclude that the transition towards IPSAS is easier in Anglo-Saxon countries where the connecting factor is dominant in the public accounting sector, while the countries of continental Europe are still struggling in the process of their conversion to accrual accounting in order to prepare the financial and budget information.
Generally, the civil law countries use the modified cash and modified accrual. Therefore, this slows down the process of compliance with the majority of IPSAS based on accrual accounting. In addition, the empirical study led by Roje et al. (2010), supposes that the transitional countries have made efforts to monitor international developments in public accounting (for instance, the implementation of the modified accrual as a measure for the gradual transition). In order to achieve ambitious socioeconomic objectives, developing countries need to support the institutional capacity of the establishment and implementation of public policies, which, in turn, requires a reform of government accounting (Chan , 2006). The social value of the reform of government accounting lies in its contribution to the achievement of development goals, including the reduction of poverty. This led lenders and international donors to promote the adoption of IPSAS for developing countries (Chan, 2006). The reform of government accounting is considered as part of the improved management in public finance; as such, it is supposed to contribute in the government’s performance and indirectly in the development of nations (Chan, 2006). Indeed, in a democracy, the government is committed to be responsive to requests for information. This should be the case in developed countries and developing countries.
On the other hand, non-democratic governments in developing countries are both, reluctant to undertake and unable to pay for the costs of the reform of government accounting.
Given the extent and severity of corruption in many developing countries, ensuring the financial integrity is a function of crucial importance for their public accounting systems (Rose-Ackerman, 1999).
The main purposes of IPSAS are firstly to promote greater government accountability in all countries, secondly, to improve the quality and reliability of accounting and financial reporting, third, to better financial management and discipline and finally to harmonize the international disclosure requirements (International Federation of Acountants IFAC, 1996).
In addition, a good accounting system supports at least accurate financial data; better government accounting system directs the attention of policy makers and managers to problem areas and, ideally, provides useful information for decisions (Simon, 1954).
The success of the reform of government accounting depends on political and management support, in addition to the availability of budget and human resources, and information technology. According to Reuters (2003), the World Bank estimated that 5% of the gross domestic product is lost due to corruption such as embezzlement. A study led by Keefer and Khemani (2004), members of the World Bank Development Group, shows that even in democratic developing countries, politicians often have incentives to redistribute resources to political rents and to private transfers that benefit only a minority of citizens at the expense of the majority. However, the accounting system contribution in achieving higher order goals, such as reducing poverty, is necessarily indirect and long-term; it is, therefore, difficult to see its benefits. With effective public accounting, it is possible to manage the finance of the state and provide audit traces to prevent and detect embezzlement.
If the goal is the socio-economic development, accounting can help achieve this goal and to ensure legal and contractual compliance, facilitating financial management and the promotion of transparency and accountability. As part of this first section, we are interested in introducing international standards in the public sector and their adoption by both developed and developing countries. From the existing literature, regarding the experiences of the transition to IPSAS in a reform plan of government accounting, we can conclude that this transition is easier for developed countries than for developing ones. Indeed, for transitional countries that suffer from a lack of financial resources, reform of government accounting is not a priority compared to basic services for the citizens of these nations; while in developed and especially the Anglo-Saxon countries, the transition to full accrual accounting was not complicated, thanks to the abundance of resources and the development of accounting in these countries.
Finally, the transition to IPSAS will promote transparency and reliability of financial information, and allow citizens to evaluate the state resources management. Therefore, in response to the requirements of democracy, public accountability has become a necessity for both developed and developing countries. SECTION 2: LINKING POLICY AND UNIFORM ACCOUNTING SYSTEM To a large extent, accounting is a product of its environment. In other words, it reflects and reinforces the particular characteristics of its national environment (Radebaugh and Gray, 1997). There are several advantages classifying and analyzing differences between countries according to Zhang (2005): first, this classification promotes a better understanding of the complex realities of accounting practices, and of factors that determine a country's accounting rules as well. Second, it provides useful information to solve some major accounting problems that exist in the world. Third, it may assist the training of accountants and auditors operating at the international level; and finally, it may allow a developing country to understand the types of available and appropriate financial reports considering the particular systems of other countries. The analysis of the factors that may influence the accounting environment is not only the key to understanding the accounting system of a given country, but more importantly, it is the basis for the classification of accounting systems and reports in an international accounting context; this provides, in addition, the
likelihood of change and its impact (Zhang, 2005). Indeed, in international accounting, researchers have made much effort to analyze and classify the reasons of accounting differences between countries. A large list of possible causes can be found in previous studies of several researchers such as: (Mueller, 1967; American Accounting Association (AAA), 19751976; Nobes, 1981; Aarpen and Radebaugh 1981-1985; Belkaoui, 1985; Gray, 1988; Lawrence, 1996). The factors that may be important and relevant in explaining international differences include politics, economy, culture and legal systems, as well as donors, taxation, inflation, theory and other factors such as language, history, geography, religion and education (Zhang, 2005). According to Camfferman, Zeff (2007), Meeks and Swann (2009), a single set of globally accepted accounting standards serves to increase the internationalization of financial markets and meets the needs of donors for financial information. Indeed, if public companies explain their transactions in the same way and in the same consistency, this would make the financial statements more comparable and may also reduce the cost of information and serve the international financial markets (De Lange and Howieson 2006; Agostino et al, 2011). The internationalization of public accounting is part of the researches related to international accounting and may be considered as a form of development of accounting in the countries that have achieved their transition to IPSAS.
Regarding the environmental factors of international accounting, a consensus seems to be established on the factors that are involved in the preparation of financial reports. Indeed, the political factor is considered as an explanation of the accounting development in the study of Choi and Mueller (1984-1978), in the report of the US Commission of accounting in 1977 and research by (Radebaugh and Gray 1997). Based on a literature review of the main factors that influence the accounting development at the national and international levels, we have chosen to focus, in our research, on the impact of political factors on the adoption of international standards by the public sector. Actually, the legal and political factors have a much greater influence on the development and implementation of accounting standards than the influence of cultural values. (Assma Sawani, 2009). On the other hand, in the accounting literature, there is a variety of standardization models that grouped countries based on their legal / political similarities. For example, the countries of the "common law", such as England, the United States, Canada, Australia and New Zealand in the same group, as countries with a "code law" such as France, Germany, Egypt and Taiwan are in another group (Assma Sawani, 2009). Nobes (2006), as a researcher in accounting, is one of many who noted that most countries follow the legal and political systems of their former colonizers
and this is reflected in the accounting practice of each nation. Also, the size and scope of regulatory authorities represent a differentiator. Thus, the United States, England and Australia as well as for the countries that belong to this group of "common law", there is a proliferation of these authorities, while in France and Germany, these official bodies are not as numerous (Assma Sawani, 2009). The index of the political structure of Gastil ranks countries according to five categories: multiparty systems, dominant party systems, one-party systems, military dictatorships, and traditional monarchies. The higher the level of political freedoms is, the better the country is ranked. Indeed, political factor influences accounting, probably, via the level of freedom, democracy and corruption. Political systems may identify the economic system of a country and consequently determine its accounting systems. Political systems also import and export standards and accounting practices. For example, the UK accounting, as it existed in the early twentieth century, was largely exported to other countries of the Commonwealth (Zhang, 2005). According to (Choi and Mueller, 19841978), modern political systems have a significant impact on accounting. Indeed, the political freedom of a country is important for the development of accounting and reporting. On the other hand, the political and civil relativism refers to the need to judge a behavior based on its political and civil
context. As for accounting, political and civil relativism is based on the fundamental assumption that the concept relies on the civil and political context of a given country (Belkaoui, 1985). Moreover, the index of democracy (2013) and the index of perception of corruption (2013) are considered as a proxy that reflects the political transparency in a country. Indeed, we have chosen to focus, in our study, on these two variables of the political environment, in view of their importance. Particularly, the goal of our study is to test their influence on the development of government accounting and even the adoption of new international standards in the public sector. Belkaoui (1983, 1985), argues that the political environment and especially the political rights and civil liberties, influence the accounting development. Furthermore, the political environment affects the accounting indirectly through its impact on the culture and the national economy (Hassabelnaby et al., 2003). On the one hand, many researchers believe that the political environment’s factors, such as the stability of the government and the currency can significantly influence the economic development, which in turn can have an impact on the accounting environment (eg Barro, 1991; Larson and Kenny, 1995). Amat et al., (2000) and Pourjalali and Meek (1995), have examined respectively the case of Spain after Franco's death in 1995 and the case of Iran after the revolution in 1979. They have come to the conclusion that, the financial accounting
and management are strongly influenced by professionals and also that the conservatism is gradually reduced. Earlier in the second section, we have presented the main factors leading to the development of accounting both at the national and international level. According to Hassabelnaby et al. (2003), in periods of democracy and economic reform, there is more development in the field of accounting. In addition, the political freedom of a country is important for the development of accounting (Hassabelnaby et al., 2003). Indeed, the political factor is considered as an explanatory factor of the accounting development in the study of (Choi and Mueller, 1984-1978), as well as in the report of the US Commission of accounting in 1977 and in Radebaugh and Gray research paper of 1997. That’s why we have chosen to base our analysis on the political factor in order to explain the adoption of IPSAS by international agencies. And in the third section, we will try to empirically test the relationship between the political system and the adoption of international standards by international agencies in the public sector. SECTION 3: EMPIRICAL PART CONCEPTUAL FRAMEWORK AND HYPOTHESIS GENERATION: Several researches were devoted to International Accounting in order to study the relationship between accounting and its environment. The literature suggests that if the business environment changes, the demand and the use of financial
information varies, leading to the development of accounting (Hassabelnaby et al., 2003). Indeed, Belkaoui (1985) suggests that accounting reflects the particular environment in which it is developing. This explains why the accounting systems, practices and disclosure policies vary from a country to another (Radebaugh, 1975; Belkaoui 1985; Adhikari and Tondkar 1992). In addition, previous studies suggest that the business practices of the financial reports are affected and can be explained by a number of environmental factors such as particular colonial history of a country or the stage of development, economic, political, legal and cultural diversity (Nobes, 1983; Goordich, 1986; Gray, 1988; Belkaoui 1995; Doupnick and Salter, 1995; Salter and Niswander, 1995). Moreover, it is generally assumed that the environmental factors that influence the accounting environment are: culture, economic development, political system, money market, inflation, tax laws, the legal system and the level of education (Mueller, 1968; Meek and Saudagaran 1990; Doupnick and Salter, 1995). Goodrich (1986) examined the relationship between political factors and the accounting environment and provides evidence that political factors are strongly linked to 'accounting groups'. Furthermore, the political environment could affect the development of accounting both directly and indirectly. Indeed, the political freedom of a country is capital for the development of accounting (Hassabelnaby et al., 2003).
Belkaoui (1983, 1985), argues that the political environment in general, the political rights and civil liberties, in particular, have significant influence on the development of accounting practices. Furthermore, the political environment affects the accounting indirectly through its impact on culture and on the national economy (Hassabelnaby et al., 2003). According to Arnaud Diemer (2003), the political rights indicator developed by Gastil (1982) and Bollen (1990) is the main parameter of the level of democracy measurement. Haswsabelnaby et al., (2003) empirically examined how environmental factors affect the development of accounting. They have used the Gastil index as a proxy to evaluate the political factor. The mentioned study found a negative and significant relationship between the political environment and the development of accounting. Also, the nature of the regime, dictatorship or democracy, influences the national culture, which in turn influences the business environment and the accounting environment (Hassabelnaby et al., 2003) Indeed, as we mentioned, the main objective of our work is to test the impact of the political system on the probability of adopting IPSAS by international public organizations. To test the relationship between the total level of freedom in a country and the adoption of IPSAS, we are referring to the report "Freedom in the World 2014" developed by "Freedom House" which in turn is based on the study conducted by Gastil (1988).
Indeed, "Freedom in the World" is an annual report about political rights and civil liberties in every country and several disputed territories. The edition of 2014 covered the development of freedoms in 195 countries and 14 territories from 1 January 2013 until 31 December 2013. The same way, we try to study the nature of the relationship that may exist between the likelihood of the adoption of IPSAS and the level of democracy in a country that we measured using the democracy index (2010). Indeed, the data concerning the democracy index (2010) will be collected from the report of the Economist Intelligence Unit. A higher score of the democracy index obtained by a country implies that the country is democratic. For example, in their published list, we find, Norway with a score of 9.80, while the Central African Republic is in last place with a score of 1.82. On the other hand, corruption is pervasive in all states of the world. Indeed, according to the corruption index developed by the agency: ”Transparency International”, we can see that corruption is not confined to developing countries or underdeveloped countries, but it also attains developed countries. Corruption causes undesirable effects on developing countries. Indeed, "Corruption hinders economic development, reduces social services, and diverts investments in the infrastructure, institutions and social services". (UNDP, 2004). Several researches are interested in the unwanted effects of corruption on the public sector and the private sector. Indeed, as many authors, Ali Isse (2003)
and LaFree and Morris (2004) focused their researches on the relationships that may exist between corruption and private investment. In addition, Tanzi and Davoodi (1997) argue that corruption has a highly significant effect on the inefficiency of public investment in most industrialized and emerging countries. Also, Ouattara W. (2011) states that the volume of public and private investment is often supposed to be affected by the extent of corruption and the practice of democracy. On the other hand, Habib and Zrawicki (2002) and Larrain and Tavares (2004) addressed the relationships existing between foreign direct investment and corruption. These authors have come to the conclusion that cooperation is negatively influenced by corruption. Among the harmful effects of corruption, there is also: the increased transaction costs. Indeed, Sakar and Aynul (2001) believe that corruption leads to additional transaction costs. Furthermore, corruption weakens economic growth by reducing the volume of investment and its efficiency. Therefore, we must fight all forms of corruption while performing the public service. Indeed, donors and financial institutions collaborate with emerging economies to deal with corruption and strengthen the duty of reliable financial information disclosure.
This way, we believe that the international standards of the public sector may address corruption ensuring a high level of transparency and helping promote a high quality financial disclosure, likely to provide clear answers as the proper management of the state. To conclude, the development of the country’s ability to identify and evaluate both government assets and liabilities is fundamental to the development of accrual accounting in a country. Thus, ensuring the financial integrity and accrual accounting are both contributions of professional accountants in developing countries (Chan, 2006). Studying the impact of the political environment on adopting IPSAS by governments, we estimate that corruption is a component of the political environment that could influence the adoption of international standards in the public sector. To evaluate the impact of corruption on the adoption of IPSAS, we used the corruption perception index (CPI). The Transparency International index ranks countries according to the perceived level of corruption that affects public administrations and politicians since 1995 on a scale of 1 to 10. The closer this index is to 1, the higher the corruption in the country is. Indeed, the CPI is now used in almost all scientific works where corruption is at the heart of the analysis. (Swaleheen, 2009, 2007). Hence, we can highlight the analysis of Selçuk (2006) who worked on corruption using Perception Index (1999, 2000) published by Transparency International
and the index of political freedom (1998), published by Freedom House. The empirical results supported that when the level of democracy increases, the level of corruption tends downward. The corruption perception index measures the perceived level of corruption in the public sector in 177 countries and territories. The objective of this research paper is to assess the impact of the level of corruption perception in a country on the likelihood of the adoption or non-adoption of International Public Sector Accounting Standards. To do so, corruption in a country is measured by the corruption perception index for 2013, taken from the Global Corruption Report 2013, published by Transparency International (2013). The country with the highest score can be considered as being the least corrupted. For example, Denmark has topped the list with a score of 91, while Somalia can be considered as the most corrupted country with a score of 8. The evidence from the literature confirms the influence of the political system on the development of accounting and generates the following assumptions: H 1. The democratic political system increases the likelihood of adopting IPSAS. H 2. The high level of freedom has a significant influence on the probability of adopting IPSAS H 3. Corruption has a significant effect on the probability of adopting IPSAS
RESEARCH METHODOLOGY: In this section, we first present our sample and then, we propose research methodology to test the assumptions and the model chosen. 1. Sample Our sample covers 166 countries, for which data about political freedoms are consistent. Results are distributed between the different strategies as follows: Strategy
Full partial No Adoption adoption adoption
Number of 27 61 78 countries Table 1: distribution of countries according to the adoption of IPSAS strategies Table A, in the appendix, lists all countries of our sample. 2. Presentation of the model The aim of our research is to study the relationship between the political system of a country and the likelihood of its adoption of IPSAS by its public bodies. The dependent variable "ADOPTION" takes the value "1" if the country uses the international standards in the public sector; "0" otherwise.
particularly international accounting harmonization, we chose to study the impact of corruption (2013), using the Corruption Perception Index, on the adoption of IPSAS by international public organizations. Third, based on researches that showed a significant relationship between the level of democracy in a country and its accounting development, we tried to test the relationship that may exist between democracy, using the democracy Index (2010) and the adoption of IPSAS by a country. The model we are going to propose is a logistic regression one:
In the following table, we present the measures adopted for these variables:
dependent variable
freedom index 2014
As for the explanatory variables, they are three in number: First, to explain the relationship between the political system and the adoption of IPSAS, we used the index of freedom (2014) as part of the political environment. Second, based on previous researches in the field of international accounting and
Democrac y index 2010
ADOPTION takes the value 1 if the ADOPTI country adopts ON ipsas and 0 otherwise is 0 if the country is at a low level of freedom, 1 if the IL_QUA country is partly LI_2014 free and 2 if the country is at a high level of freedom a score between 0 and 10, a score ID_QUA close to 10 NTI_201 implies that the 0 country is democratic.
Based on the total level of freedom and the corruption perception index, results in the logistic regression model make us deduce that these two variables are not significant at a level of 5%.
is 0 if the country suffers a high level of corruption, 1 if the country suffers a Corruptio medium level of IC_QUA n index corruption, 2 if the LI_2013 2013 country suffers a low level of corruption 3 if corruption in a country is not of great impact. Table 2: Measurement of Variables
Variable s
IL_QUA LI_2014 IC_QUA LI_2013 ID_QUA NTI_201 0 ADOPTI ON
Number of Avera observatio ge ns
Standar Mi d n deviatio n 1.0 0.810 8
So, in opposition to our expectations, corruption and the total level of freedom in a country do not have a significant effect on the adoption of IPSAS by international agencies.
Ma x
165
1.212
9.8
145
0.959
0.686
0
2
142
5.549
2.279
0
2
166
0.163
0.370
0
1
Table 3: Descriptive statistics of the variables 3. Analysis of the results In this section, we will discuss the results extracted from the logistic regression model. As we mentioned earlier, our model aims to determine the nature of the relationship that may exist between the political system and the adoption of IPSAS. From Table 4, we found that the only variable that has a relationship with the adoption of IPSAS is the democracy index at 10% threshold.
According to (Assma Sawani, 2009), the political environment is naturally linked to the legal environment. Indeed, the accounting literature supports that the political environment through its stability and the level of political freedoms, influences accounting doctrine. For example, the level of civil liberty in one country affects the extent of financial information disclosure which does not correspond to the results of the logistic regression of our model. There is also evidence that countries with the least civil liberty have limited financial disclosure. Assma Sawani (2009), suggests that people who do not have the freedom to choose their own government and to support or oppose policies will not have the tools or resources to set up a transparent accounting. While these statements are logical, significant empirical evidence is still being sought by researchers to test their validity. Furthermore, the political environment affects the accounting indirectly through its impact on culture and the national economy (Hassabelnaby et al., 2003). According to (Arnaud Diemer, 2003), the indicator of political rights established by
Gastil (1982) and Bollen (1990) represents the main measure of democracy. Moreover, referring to (Zhang, 2005) it looks obvious that an accounting system that is useful for a centralized economy must be different from another accounting system that is dedicated for a market economy. In the first, the state owns all the assets and lands; there is little or no private property; the “external” auditors are simple government employees; and the concept of periodic determination of profit does not make sense. Furthermore, when citizens cannot choose the members of the government or influence government policy, the level of financial information disclosure tends to be lower (Assma Swani, 2009). In addition, the level of political freedom in a country is usually assumed to be dependent on the level of political rights, civil liberties and the type of political system. The More the political rights and the civil liberties are, the higher the accounting profession will acquire freedom and flexibility and the more the financial information disclosure will be honest and balanced (Zhang, 2005). Indeed, the political freedom level in a country is designed to be representative for the development of general accounting disclosure (Zhang, 2005). Regarding our model, and the results of logistic regression, we can conclude that the total level of freedom has not a significant impact on the adoption of IPSAS by international agencies. Nevertheless, the democratic political system explains at a level of 10% threshold the adoption of IPSAS by international
agencies. For instance, Canada, whose democracy index for 2010 is 9.08, Spain and the United States also, with democracy indexes of, respectively, 8.17 and 8.18, and New Zealand, which has the highest democracy index of 9.26, have all adopted IPSAS. By contrast, countries with a very low index of democracy like Afghanistan (2.48) and North Korea (1.08) have not adopted IPSAS.
Variables
Coeffici ent
Significa nce
Standa rd error
IL_QUALI_20 0.389 0.579 0.700 14 IC_QUALI_20 0.009 0.979 0.333 13 ID_QUANTI_ 0.39 0.099 0.237 2010 Table 4: Test of the model assumptions MODEL VALIDITY Concerning the criteria considered for validity of the model provided in the appendices, chi-square is significant at the level of 0.01%. The R² is 15.26% for our model; this represents a relatively acceptable level to evaluate the explanatory power of the model.
Number
Hypothesis
Result
H1
The democratic political system increases the likelihood of adopting IPSAS.
acceptable. Yet, the components of the political system studied do not appear to influence the general adoption of IPSAS.
Accepted
H2
The high level of freedom has a significant influence on the probability of adopting IPSAS
Nevertheless, the results of our study, in accordance with our expectations, show that the level of democracy in a country increases the probability of adopting international standards.
Rejected
H3
Corruption has a significant effect on the probability of adopting IPSAS
Rejected
Table 5: Overview of hypothesis testing From the results of the logistic regression model that we have used to explain the nature of the relationship that may exist between the political system of a country and its adoption of IPSAS, we can conclude that: First, the level of democracy in a country affects significantly and positively the probability of adopting IPSAS by this country. Second, the total level of freedom as measured by the index of freedom does not have a significant effect on the probability of adoption of IPSAS by a country. Finally, the corruption perception index does not explain the adoption or not of international standards in the public sector by a country. The 15.26% explanatory power of our model can be considered as relatively
Actually, it looks obvious that, in representative democracies, pressure for reliable financial information is much stronger than in countries where there is an authoritarian regime.
CONCLUSION: Researches concerning international accounting show all that accounting cannot develop while isolated and finds its growth when it is in interaction with its economic, legal, political and cultural environment. Extensive literature has been indeed devoted to the classification of accounting systems based on these criteria that vary from a country to another. Nevertheless, the results of the empirical literature examining the relationship between the political system of a country and its accounting development do not allow definitive conclusions. So, inspired by previous researches such as (Choi & Mueller, 1984-1978) and (Radebaugh & Gray, 1997), in which the political factor is regarded as an explanatory factor in the development of accounting in a given country, and being aware of the importance of public accounting in developing nations, the work we have conducted in this paper was designated primarily to provide answers as to the nature of the relationship between the political system and the adoption of IPSAS by international agencies. The first part of this paper aimed to put our research in its theoretical framework where we have introduced the neo-institutional theory. The second part was dedicated to the introduction of international standards in the public sector. We first started by the presentation of IPSAS and their main advantages and limitation. In the second and the third section, we have been interested, respectively, in the adoption of IPSAS by the developed and developing countries. These sections have allowed us
to understand why the developed and developing countries are adopting IPSAS, and the implications of this decision on the public sector. Furthermore, we came to the conclusion that the degree of development of accounting in developed countries, as well as the total level of freedom and the rule of democracy in these countries, lead to an easier transition towards IPSAS adoption. While for developing countries, the transition towards this new global trend reveals a moral dilemma because of the complexity and cost of the process. The adoption of IPSAS was so widely supported by international financial organizations such as the World Bank and the IMF. Also, the IPSASB has planned a gradual transition to full accrual accounting in accordance with IPSAS by the establishment of a set of standards for the modified accrual and modified cash basis, and to help developing countries to make their transition. Indeed, many researchers in the field of international accounting, such as, (Mueller, 1967) (American Accounting Association (AAA), 1975-1976 (Nobes, 1981) (Aarpen & Radebaugh 1981-1985) (Belkaoui, 1985) (Gray, 1988) (Lawrence, 1996) have classified the countries according to a number of criteria. Regarding these criteria, there seems to be a consensus, and the main variables identified by this abundant literature are: politics, economy, culture, legal systems, as well as donors, taxation, inflation, theory and other factors such as language, history, geography, religion and education.
In the final section, we were committed to empirically identify the impact of the political system as measured by the index of freedom, democracy index and the corruption perception index, on the adoption of IPSAS by international public bodies. We have tried to confirm our assumptions based on a sample of 166 countries. This sample includes countries that have already made the transition to IPSAS, those who have planned a reform plan for government accounting and are doing their migration towards international standards in the public sector, and finally, those who do not adopt IPSAS and that have not even planned the transition towards the new public sector standards. The model chosen for our analysis is a logistic regression model, in which the endogenous variable is the adoption of IPSAS, a binary variable that takes the value of "1" if the country in question adopts IPSAS and a value of "0 "otherwise. From the results of the logistic regression, we could conclude that the total level of freedom and the corruption perception index in a country do not have a significant effect on the probability of adopting IPSAS by government agencies for this country. We also found, as expected, that the level of democracy in a country as measured by the democracy index increases the likelihood of adopting IPSAS by public bodies in this country. This confirmed our hypothesis about the positive relationship between the adoption of IPSAS and the level of democracy in a country. Meanwhile, our second hypothesis concerning the total level of freedom and
our third assumption about the level of corruption perception, were both rejected. Like all research, this study that we conducted is subject to some limitations, this is rooted in several reasons. First, the data we have collected were not complete for all countries of our sample due to the different sources these data were collected from: the report of "freedom House" providing data on the index of freedom, the democracy index collected from the "Economist intelligence Unit" and the corruption index developed by the agency "Transparency International". Second, we find that using these three variables only to explain the nature of the relationship that may exist between the political system and the adoption of IPSAS can provide clear answers about this relationship we are trying to test, but the answers may be insufficient. Indeed, there are certainly other elements of the political environment that could still shed more light on the relationship between the political system and the adoption of IPSAS by international organizations. Several questions then emerge from our analysis and appear unresolved. In the near future, we plan to extend our research by studying the impact of other factors on the probability of adopting IPSAS by international agencies. We think it would be interesting to rank countries according to a number of criteria and factors explaining the state of development of their government accounting systems.
Partial Adoption Full Adoption
Countries
This table shows the distribution of countries according to their strategy of adopting IPSAS.
Angola, Antigua and Barbuda, Bahamas, Bahrain, Belize, Benin, Bolivia, Brunei, Bulgaria, Burkina Faso, Myanmar, Cape Verde, Chile, China, Congo, Côte d'Ivoire, Cuba, Djibouti, Dominica, Egypt, UAE , Ethiopia, Gabon, Grenada, Guinea, Equatorial, Guinea Bissau, Guinea Guyana, Haiti, Solomon Islands, Iran, Iceland, Iraq, Jordan, Kiribati, Korea (N), Korea (S), Libya, Madagascar, Mexico, Nauru, Niger, Oman, Panama, Papua New Guinea, Qatar, Dominican Republic, Saint Vincent, Saint Lucia, Saint Kilts and Nevis, Sao Tome and Prin, Senegal, Seychelles, Sierra Leone, Somalia, Sudan, Suriname, Syria, Taiwan, Chad, Thailand, Togo, Tonga, Transkei, Trinidad and Tobago, Tunisia, Tuvalu, Venezuela, Western Samoa, Yugoslavia, Zaire
No Adoption
South Africa, Australia, Brazil, Canada, Comoros, Costa Rica, Ecuador, Spain, United States, France, Israel, Jamaica, Japan, Mongolia, Norway, New Zealand, Paraguay, Philippines, Poland, Czech Republic, Romania, United Kingdom, Singapore, Switzerland, Uganda, Uruguay, USSR
Strategy
Afghanistan, Central African Republic, Albania, Algeria, Saudi Arabia, Argentina, Austria, Bhutan, Belgium, Barbados, Bangladesh, Botswana, Burundi, Cambodia, Cameroon, Cyprus (Greece), Cyprus (Turkey), Colombia, El Salvador, Fiji, Gambia, Guatemala, Honduras, Hungary, India, Indonesia, Ireland, Italy, Kuwait, Countries Lebanon, Lesotho, Liberia, Luxembourg, Malawi, Malaysia, Maldives, Malta, Mauritius, Morocco, Mauritania, Mozambique, Nepal, Nicaragua, Nigeria, Netherlands, Pakistan, Peru, Portugal, Laos, Rwanda, Sri Lanka, Swaziland, Sweden, Tanzania, Turkey, Vanuatu, Vietnam, Yemen, Zambia, Zimbabwe.
Strategy APPENDIX
Table A: the distribution of countries according to their strategy of adopting IPSAS
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