Why Cash-Based Budgeting Still Prevails in an Era of Accrual-Based Reporting in the Public Sector

Abstract

This paper discusses the phenomenon that governments in many Western countries have transferred their cash-based systems into accrual-based systems for reporting purposes during the last decades, while still retaining cashbased budgeting systems. The main question we want to answer is whether there are more substantial reasons why governments prefer cash above accruals for budgeting. Our paper is the result of a comprehensive literature review. At first glance, combining accruals for both budgeting and reporting seems to be preferable above combining cash for budgeting and accruals for reporting: there is consistency between the budgeting and reporting logic, and accrual information is richer than cash information. However, we are in favour of a more nuanced perspective. The combination of cash for budgeting and accruals for reporting can be defended through the lens of a fundamental budgeting logic that identifies all expenditures and revenues expected for the budget year and sees the comparison between cash-based appropriations and actual cash outflows as an easy and straightforward control mode. Moreover, this combination aligns with the dominance of budgeting over reporting and the limited accounting expertise of many accounting information users (for example, public sector managers and especially politicians). We argue that the ultimate transfer from cash to accruals in budgeting needs to be based on a solid assessment of its added value to these users, and not due to pressures of accounting experts.