Posted: May 25th, 2022

Management Accounting in the Public Sector

Management accounting is an important factor that helps organizations to map their future directions through providing managers with necessary information for the establishment of strategies that ensures all inputs, processes, and outputs are in line with the organizational goals. Through the information provided by management accounting, managers access information that is critical in formulating policy, making comparison between alternative situations, and evaluate and examine performance. While management accounting has similar roles across organizations, the accounting procedures and techniques tend o differ significantly in the private and public sector.

Management Accounting in the Public Sector:

Management accounting in the public sector is usually conducted by the government with the main aim of protecting public treasury through preventing and identifying corruption and graft. Therefore, this process is normally geared towards facilitating and promoting sound financial management and public accountability. In an efficiently managed process, management accounting involves planning and budgeting for financial management activities like collecting revenues and taxes, borrowing, paying bills, and repaying debts. Public accountability through this process is promoted through the accountability of the chief executive’s bureaucracy, legislature, and government to the people.

In the public sector, information obtained from management accounting is also used for external communication to users interested in the direction and effectiveness of a governmental entity (Hoque & Adams, 2008). The recipients of this information can be classified into three categories i.e. providers of resources, recipients of products and services, and parties conducting a supervisory function. While resource providers include lenders, suppliers, and employees; recipients of products and services include taxpayers and ratepayers and oversight parties include parliament, labor unions, employer groups, analysts, and regulatory bodies.

In addition to accounting in the service of managers only, management accounting in the public sector also incorporates budgeting and control. Generally, these initiatives can be considered as instruments of financial policy on revenue and expenditure to accomplish macroeconomic objectives. Consequently, management accounting in the public sector is not only an expression of public policy but it’s also a demonstration of political preferences.

Management Accounting in the Private Sector:

Management accounting in the private sector is normally for the purpose of preparing accounting information to meet the needs of users who are internal to the organization or business. In most cases, this financial information is prepared frequently and likely to include non-financial information and forecasts of the organization’s future. Since management accounting in the private sector is largely non-regulated, managers are at liberty to generate the kind of information they need. Consequently, managers use a format that they consider to be helpful to them based on the available technology and financial information.

Notably, profit-oriented financial managers in the private sector usually have some flexibility to accomplish what they need to do to maintain the bottom line during the process of management accounting. This flexibility basically originates from the fact that this process is not regulated in the private sector. Furthermore, the need to maintain the bottom line drives these managers into using such means when conducting management accounting. Due to the hierarchical structure of organizations in the private sector, financial management decisions and accounting are made at the top and passed down to the bottom of the company. In some cases, financial managers are not accountable to the employees at the bottom of the organization.

Public Sector vs. Private Sector Management Accounting:

As previously mentioned, the use or practice of management accounting in the public and private sector differs significantly. These differences in the process can largely be attributed to the variations that exist in financial management practices between the public and private sector. The financial management processes and practices between these sectors vary in context, profit, and decision-making processes. Some of the major ways with which management accounting varies between the public and private sectors include & #8230;

Scope:

Unlike the private sector that has been associated with management accounting for a long period of time, the public sector identified the benefits of management information systems recently (Funnell & Cooper, 1998, p. 244). Management accounting could have had a minimal presence in the overall public sector where there were few concerns in performance appraisals and marginal evaluated outputs. However, since its introduction in the public sector, management accounting has been expanded to measure additional aspects or dimensions of performance. In contrast, it’s mainly used for presentation of financial information by managers in the private sector.

Objectives:

Management accounting in the public and private sectors differ significantly in their objectives and intended purposes. In the private sector, it’s used as a means of informing an entity’s stakeholders about the business’ performance, helping in decision-making, and to provide information to investors and regulators. On the contrary, it’s used to provide financial summary, the foundation for the next budget, identify assets and liabilities, and promote democratic transparency in the public sector.

Accounting Methods:

Financial managers and accountants in the public and private sectors use different accounting methods since they are bound by different accounting principles. In the private sector, management accounting processes are directed by the general methodology of accounting. In this case, the process incorporates a series of practices like double-entry accounting procedures that are used to facilitate financial accuracy and uniformity. These methods may not be used in the public sector because financial managers are not generally bound by these methods. Since management accounting in the public sector involves performance appraisal, the methods used differ, especially in areas like budgeting.

Complexity:

Managers of entities in the private sector have certain flexibility when conducting their accounting process since these organizations are not regulated. This has enabled them to use different format for management accounting depending on the kind of information and technology available to them. The process is quite different in the public sector because of the broad range of user of this information and its objectives. As a result, the preparation of public sector information is relatively more complex as compared to the procedures used in the private sector (Barrett, 2004). The models and policies that are used in this sector are different to an extent that it can easily result in wrong expectation and conclusions of financial results by users.

Conclusion:

Management accounting has emerged as an important financial aspect across many organizations in both the public and private sectors. This process is used to accomplish similar goals in these sectors though the objectives may vary slightly. Nonetheless, there is a relatively great difference in management accounting between the private and public sectors.

References:

Barrett, P. (2004), Address to the Challenge of Change: Driving Governance and Accountability

CPA Forum 2004, Australian National Audit Office, viewed 13 July 2012,
Funnell, W. & Cooper, K (1998), Public sector accounting and accountability in Australia,

South China Printing, Hong Kong.

Hoque, Z. & Adams, C (2008), Measuring Public Sector Performance: A Study of Government

Departments in Australia, CPA Australia, viewed 13 July 2012,

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