Public sector accounting reforms in the Indonesian post-Suharto era

The aim of the study is to understand the institutionalization process of an accrual accounting system in the Indonesian public sector. The data were drawn from three sources: (1) official documents (i.e. laws and government regulations) about the adoption and implementation of accrual accounting in the Indonesian public sector; (2) publicly available information about the social, economic and political developments leading to the process of the adoption; (3) interviews with 36 participants who have been involved in or have an understanding of the internalization of accrual accounting in the Indonesian public sector. Drawn from an integrated model of institutionalization (IMI) adapted from Dillard, Rigsby, and Goodman (2004), and Dambrin, Sponem, and Lambert (2007) inspired by New Institutional Sociology (NIS) this study was able to identify and discuss the features of the institutionalization process, at the national level and within one municipality used as a case study. This study found that at the economic and political level and in the organizational field the new ideals which require the adoption of accrual accounting in the Indonesian public sector have been mobilized by the technocrats (economists and accountants) at the Ministry of Finance since the 1980s. This mobilization occurred when the country encountered a fiscal crisis. The study also identified that the desire to adopt accrual accounting may have been driven by the wish to follow a similar practice adopted in other countries. Nonetheless, a formal adoption of the accrual accounting system was only realized following the collapse of Suharto’s regime in 1998 through the issuance of Law 17 (2003) as new discourses and government accounting standards in 2005 as new techniques. In this municipal case, beyond the economic reasons, the move to formally adopt the accrual accounting system at the economic and political level after Suharto appeared to be part of the government’s response to the demand from the public and international financial authorities (the IMF and the World Bank). At the organizational level, drawing from the experience of one municipal government, the internalization processes of the accounting system were primarily motivated by the presence of legal enforcement. This occurs because the political and economic affairs of local governments in Indonesia are regulated by the central government. Therefore, local governments effectively contribute to the domination of the central government in the mobilization process. Beyond this, the process and outcomes of the institutionalization of the accrual accounting system contradict the intended benefits, as expected in the Law 17 (2003), and the government accounting standards issued in 2005. In this case, the lack of skills and experience in using accrual accounting has increased accounting costs of the municipality and the officials within the municipality have yet to use the accrual-based accounting information for real decision making. In addition, power and old habits of local actors (i.e. senior officials in a municipal government observed) relating to a corruption practice (bribery) surrounding the adoption have also produced an unintended outcome. In this vein, technical capacity, power, and old habits of local actors affect the extent to which a new accounting system could be internalized. An important insight that we can draw from this study is that the process and outcomes of this institutionalization are not only shaped by the pressures from external factors, but also by activities, processes and routines of actors within organizations. One of the implications of the these findings for policy making is that Indonesian Central Goverment needs to be aware of the capacity of local governments in implementing policies and programs anfd provides approptriate incentives to achieve full uptake. A lack of competencies besides making successful implementation difficult, may exacerbate frustration fuelling active resistance. Further research could address the relationship between capability building and the proximity of educational institutions. The thesis indicates that successful implementation is limited. This encourages further research into the factors that impact implementation. The influence of culture such as a common practice of bribery should also be considered. The public and academics are also reminded that the adoption of a business-style accounting system in the public sector can be costly and may act against its promoted purposes. The thesis also contributes to the public sector accounting literature by reducing the gap between what is known and unknown about governmental accounting practices in one of emerging economies in Asia, that has been rarely investigated