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Accounting and Sustainable Development: A Case of Poverty Reduction in an Emerging Economy

  • Padmi NagirikandalageEmail author
Living reference work entry
DOI: https://doi.org/10.1007/978-3-319-69626-3_114-1




Accounting has been widely used in both public and private sectors across the globe for the sustainable development of corporates as well as economies. However, in the recent past, there has been a wide discussion on poverty reduction and public sector accounting reforms especially in emerging economies in order to enhance the transparency in government expenditure, auditing and accountability as well. Since the governments are responsible on providing essential public services which have a greater impact on poverty, adequate measures in place to monitor the spending is vital for any country with an emerging economy. Moreover, according to the United Nations Millennium Development goals (MDGs) especially on reducing poverty, governments may require to recruit more employees for public sector to fill the gaps in the service in many essential areas such as education, health, and agriculture. Additionally, the recent past financial crisis and recession also have impacted on poverty reduction programs within emerging economies especially which are prone to corruption, fraud, and lack of transparency on government expenditures as well. Due to these various reasons, some emerging economies such as that of Sri Lanka are struggling to minimize the huge budget deficit of the government while leaving with less money for poverty reduction within the country as well. Therefore, unless these gaps are filled, many people in emerging economies will continue to live in poverty (Tridico 2009).

Since there are several issues to deal with in order to eradicate poverty in emerging economies, those countries need to focus on good practices to manage government expenditures efficiently and effectively. Also, transparency and accountability are also important, and hence, adopting practices like New Public Management (NPM) (Larbi 2003; Christensen 2007) is vital to reform the government sectors especially the countries with emerging economies. These new reforms have significant advantages such as cost-cutting exercises in the public sector, as well as labor disciplines in order to improve the optimum utilization of resources and to enhance flexibility within the decision-making process Lapsley and Pallot 2000; Hood 1991). Moreover, the public sector has been challenged in a positive manner in terms of contracts and tendering, a more decentralized public sector service, the establishment of standards, clarity and performance measures for following accountability procedures, and providing more powers to managers as accountability procedures require the assignment of responsibility (Nagirikandalage and Binsardi 2015). In this regard, accounting has been given much more prominence within these NPM reforms (Hood 1995) where the accounting practice in public sectors has been replaced with new structures and management systems. However, according to Lapsley (2003), lack of knowledge of this particular area still remains. However, the case is as such emerging economic countries also have implemented NPM reforms (Rahaman 2009; Nor-Aziah and Scapens 2007) in order to reduce poverty by enhancing public sector expenditures transparency and accountability. However, there is resistance to such reforms due to socioeconomic and political factors. Correspondingly, the objective of this entry is to explore challenges and strategic implications for adopting accounting reforms and NPM in an emerging economy such as that of Sri Lanka to understand the effects on sustainable development and poverty reduction within the country as well.

This entry adopted exploratory and qualitative approach as Merchant and Van der Stede (2006) have revealed the fact that qualitative analysis and case-study research involving interviews, observations, or documentary analysis have been seen as the most common approach in organizational processes and accounting practices research. Additionally, qualitative approach provides opportunity to be involved with relevant agents or organizations directly. Hence, the researcher could penetrate respondents’ social construction including cultures, thinking, and behavior which will immensely assist the in-depth and holistic understanding of public accounting practices in terms of poverty reduction programs while maintaining a sustainable development. Since the entry is qualitative and exploratory in nature, new findings would be generated following relevant literature (Creswell 2003; Given 2008365体育网站) via an analysis of archival information and secondary qualitative data. Other secondary data includes various forms of relevant literature such as published books, journal articles, memoranda, written reports, administrative reports, newspaper articles, and video/TV clips.

Emerging Economy: A Case of Sri Lanka

Sri Lanka is a multi-religious and multiethnic county where majority is being Sinhala Buddhists. Formerly known as Ceylon, Sri Lanka has long served as an important strategic destination in the Indian Ocean and the “silk road” attracting many businesses and travelers from Southeast Asia, India, Middle East, and East Africa. Although the country’s recent history has been fouled by a 30-year-long war, postwar Sri Lanka is gearing toward development through governance, economic reforms, rebalancing the foreign policy, and reconciliation. According to UNDP (2018), Sri Lanka recorded the highest Human Development Index (HDI), a composite statistic of life expectancy, education, and per capita income indicators, which are used to rank countries into tiers of human development. Also, the HDI was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone (UNDP 2018).

Being a British colonial country (1815–1948), Sri Lanka was introduced to tea and rubber as major economic plantations to generate foreign investments to the country. However, these attractive economic developments came with several issues such as dreadful landscaping in tea estates due to poor environmental management over the years where the country still suffers. Moreover, thousands of acres of rain forests in the country were destroyed for growing tea and rubber, particularly without understanding the nature of the natural ecosystem of the country which was well-understood and followed by ancestors of the country for thousand years. However, for some decades, tea was the major source of foreign exchange to the country, and still it has been playing a major role of country’s economy. Also, tea industry employs more than one million of people directly or indirectly and according to the reports of the Central Bank of Sri Lanka. Since gaining independence in 1948 from Britain, the biggest blow to the country’s economy occurred in 1978 with the introduction of an open economy which was again hit by the three decades of civil war ended in 2009. Since then the door was opened for foreign investments which boosted economic, environmental, and social developments within the country (Athukorala and Jayasuriya 2012).

Evolution of Accounting Practices Within the Public Sector in Sri Lanka

In terms of the public sector accounting reforms in Sri Lanka, there are three periods which could be derived from the long and rich history of institutionalized accounting practices within the country, spanning over 2500 years, namely, the precolonial period (815–1801), the colonial (1802–1947) and postcolonial (1948–2009) periods, and the recent period (to the present). Furthermore, the reforms introduced by various authorities and their behaviors could be clearly identified in defined periods which may have been influenced by various factors within the public sector accounting. For example, while the local professionals and academics challenge the current existing system with more direct influences from corrupted politicians which in turn makes suspicions over the auditor general’s independence to carry out duties impartially, there has been a period of monarchical systems where a greater transparency being exercised in public sector accounting reforms (Rajapakse and Amarasinghe 2009365体育网站). However, the monarchical systems were abolished after British colonization and the recent public sector accountability are facing many challenges as mentioned above.

Interestingly, during the postcolonial period as compared to South Asian regional countries like Nepal which has diverse historical backgrounds has exposed to similar accounting and budgeting reform ideas propagated by international organizations and donor agencies since the 1970s (Adhikari et al. 2013). Particularly, the absence or presence of a colonial legacy has led them to substantial differences in how these public sector accounting reform ideas have taken hold in these two countries, as well as in the level of participation of government accountants and bureaucrats in the reform process. Moreover, a study carried out by the Asian Development Bank in various less developed countries, namely, Azerbaijan, Fiji Islands, Republic of the Marshall Islands, the Philippines, and Sri Lanka, has showed that Sri Lanka’s private sector accounting and auditing arrangements were well adopted compared with those of other countries even including the developed countries.

365体育网站During the 1990s, the Sri Lankan government appointed a commission to investigate and strengthen the financial sector as the government had to deal with significant fiscal costs through bailouts, due to the collapse of many financial companies within the country. This commission suggested adopting international accounting and auditing standards in order to improve and enhance the financial sector disclosures, and as a result the Sri Lanka Accounting and Auditing Standards Act 1995 was introduced; hence Auditing and Standards board was established as well.

Although the accounting standards were introduced late, the Sri Lankan government had already adopted the Planning, Programming and Budgeting (PPB) approach to public expenditure management in the 1970s. However, after the new government formed in the 1970s, the public officials and politicians had a positive attitude toward the new budgeting model PPB test trial (Thirulinganathan 1976), which ultimately led to a transformation of the entire budget of the country in accordance with PPB in 1974. However, this was briefly replaced by zero-based budgeting for 3 years during the period of 2003–2006 in order to confront the increasing budget deficit which was unsuccessful (Kuruppu 2010; Adhikari et al. 2013).

The recent period accounting reforms in Sri Lanka relates to the concept of “accrual accounting” more where the transactions are recognized as underlying economic events regardless of the timing of the related cash receipts and payments (ICASL 2009; Khan and Mayes 2009). The full accrual accounting framework has been implemented well only in few countries so far; however other countries including emerging economic countries are considering this framework to be introduced as a new reform to public sector accounting.

However, literature argue the fact that the improved governance, accountability, and performance of public sector organizations cannot automatically be achieved simply by issuing new laws and private sector reporting standards and producing accrual-based reports (Barton 2011). Therefore, the implementation of such reforms needs to be adopted in a way that it could benefit the country, as an example, many developed countries have adopted a more decentralized approach by which they can consider the benefits of devolution of authority for day-to-day accounting and financial reporting to line entities, rather than attempting to undertake these functions centrally. However, due to capacity constraints, this approach may not be feasible in the short term in the context of an emerging economy which could further create risk that central government (such as Ministry of Finance) would not receive necessary reports from line entities in a timely manner (Khan and Mayes 2009). Apart from facilitating accrual accounting systems, Sri Lanka’s State Accounts Department (SAD) also started to make accounting reports more transparent by providing them online in 2003.

However, Development Bank criticized the public sector reforms because of non-compliance with formal requirements, such as delayed submission of audited annual reports. However, World Bank (2007) proposed the Public Finance Bill to provide a modern framework of public sector reporting and accountability. Following this modern framework, an e-framework was also set up in 1983 to address concerns about efficiency, effectiveness, and accountability (Yapa and Guah 2012). For example, Yapa and Guah (2012) have proven the importance of the economy and efficiency in the usage of public funds by providing more convenient access to public accounting for citizens in Sri Lanka (Yapa and Guah 2012). Sri Lanka’s State Accounts Department (SAD) began making Government financial statements available via a website portal with a pilot project in 2003, which aimed to lead to institutionalized publication in 2004 (Chandrasena 2008).

365体育网站The SAD website, which publicly displays 2002 financial statements and onward, is designed for enabling the public and line agency accountants to review the yearly results online. Furthermore, relevant details for contacting SAD are provided on the website portal to allow any interested party to raise queries. Hence, this e-government adoption of public sector accounting reforms could increase transparency of accounting information and ultimately could lead to the enhancement of both political and administrative accountability

Impact and Challenges of Implementing Accounting Reforms for Poverty Reduction and Sustainable Development

However, due to the World Bank classification, Sri Lanka being an upper middle-income country, there are key challenges that still remain the same as it needs to realign public sector accounting reforms and policy, ensuring appropriate resource allocations in various public sector organizations. However, with the implementation of new reforms, according to the World Bank (2014), it is revealed that the economy has seen robust annual growth well above its regional peers. Additionally, due to economic prosperity being sliced broadly, Sri Lanka has been able to meet the Millennium Development Goal (MDG) target of halving extreme poverty, outperforming other South Asian countries (World Bank 2014).

As per the socioeconomic factors such as income, education, and employment are considered, there are apparent inequalities between various ethnic groups and various areas of living, and etc. This is in terms of access to economic resources (Sriskandarajah 2005) in Sri Lanka which in turn could impact on public accounting reforms. However, a gradual implementation of major accounting reforms in public sector organizations to improve the services for public is observed since the civil war ended in Sri Lanka. Bandusena (2013) also has mentioned a mandate encompassed by the government ministry in order to have an efficient and people-friendly public service by eliminating corruption and developing management practices using modern technology which could be easily adopted within accounting practices as well. In the context of Sri Lanka, previous studies have emphasized the significance of implementing such novel accounting reform in order to reduce extreme government expenditures, to eliminate subsidies to loss making public enterprises, and to reduce spending on civil servants, both through job reduction and through reducing the cost of the noncontributory pension scheme (Jayawardena 1997).

However, economic expertise within the country are still criticizing the fact that the country is not moving forward yet trapped in the neoclassical model since 1977 (Gunaruwan 2014). Since the appropriate accounting measures assist the sustainable development and poverty reduction, the Committee on Public Enterprises (COPE) was set up by parliament to examine the affairs and reports of public enterprises. Moreover, accountability and transparency have been controlled by the auditor-general who has been appointed by the president and is responsible for auditing public accounts and reporting the findings to parliament. However, this has been criticized as the president in Sri Lanka having executive powers, and therefore, the biasness has been questioned. Therefore, the challenge of political corruption can be immense and negatively influences public sector accounting practices (Nagirikandalage and Binsardi 2015).

Moreover, due to the geographic location in the “silk road,” it has benefitted Sri Lanka in terms of exporting goods to the global market. As a result of that, international trade of Sri Lanka also had to initiate the implementation of global standards required for the international trade. Hence, the businesses in Sri Lanka also had to follow disclosure of sustainability and transparency of business activities which were introduced in the recent past as it was crucial factor in winning the global market and its stakeholders.

On the other hand, accounting has utilized the areas of sustainability as in the late 1990s, providing a disclosure of sustainability as a report in more comprehensive and systematic way was begun in order for the organizations to increase transparency of their activities than ever before. According to Bansal (2005), the organization contribution toward the social equity and integrity of environmental and economic is solely disclosed by the sustainability reports within the accounting reporting. Enacting of new laws, regulation, and penalties for particularly appalling use of resources would kept organizations stand to attention and to be more accountable (Henri and Journeault 2008) as well. Also, the stakeholder’s attention particularly on the areas such as supply chain management, risk management, sound business strategies, corporate social responsibilities, etc., were further emphasized the need of sustainability reporting of organization (Lee 2008). Although the developed economies have sustainability reporting in more comprehensive and systematic ways (Burritt and Schaltegger 2010; Frost 2007; Othman and Ameer 2009), however the field of sustainable reporting has not yet been developed well in emerging economies (Sahay 2004; Md. Habib-Uz-Zaman et al. 2011).

Sri Lanka is an emerging economy, and the emerging economies have their own political, cultural, and social ideologies which may be used as triggers of implementing new system, while on the other hand, these might be barriers and cause to tarnish the efficacy of the system. Political instability might be a major obstacle of imposing sustainable laws and regulations within certain emerging economies such as Sri Lanka where corruption and political interventions challenge the jurisdiction of the country. Moreover, some studies have argued the fact that mere accounting reporting on sustainability is not enough as Kanter (1977) suggests that sustainability efforts may require more organic forms of organization design in order to foster innovation of services, products, and processes beyond reporting. However, new accounting reforms and practices such as disclosing corporate sustainability will have a greater impact on public sector accounting to increase transparency and accountability and in turn will impact on poverty reduction within those countries as well. Since responses to climate change also interact with the goals of poverty reduction emerging economies must be attentive to integrate good practices in accounting such as sustainability reporting in their public sector accounting reforms.

As per the challenges for implementation of such accounting practices in order to assist the poverty reduction in Sri Lanka, political instability and corruption and fraud during the recent past have immensely affected sustainable development. Moreover, in less developed countries, people in poverty seem to have barriers in access to financial services (ADB 2019), hence making poverty reduction and sustainable development more difficult as well. As per the case in Sri Lanka, since people are more vulnerable toward natural hazards, poverty reduction program implantation has been challenging, and also these circumstances have opened avenues for financial fraud and corruption within officials backed by the governing politicians. This implies the importance of good accounting practices where the public spending could be monitored and well audited to eradicate such behavior by the people in power. Moreover, World Bank and United Nations have identified that certain measures such as investment in disaster-proof housing or disaster insurance which are cost-effective ways to contain disaster losses are mostly absent in less developed countries. As Sri Lanka experienced frequent natural disasters such as severe floods and draught in the country recently and as there are lack of protection available for them via the public services, households have been coping within their existing resources and their community (Sawada and Shimizutani 2008; Sawada 2007), and this community-based coping mechanism has been popular in less developed countries as well (Collier et al. 2008; Ligon 2008). However, this self-reliance has created many other social issues where people may have obtained informal credit for the emergency matters even from other than their families. Overall, relaxing credit and financial constraints on the poor could therefore assist them to be more productive while taking riskier investments (Castells-Quintana et al. 2018).

To conclude, the findings underline the scope for policy intervention to improve access for poor, as an example, improved access to financial services. Moreover, the government should be adopting new public accounting reforms in order to enhance transparency and accountability to minimize corruption and fraud in the public sector.



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Authors and Affiliations

  1. 1.Chester Business SchoolUniversity of ChesterChesterUK

Section editors and affiliations

  • Paschal Arsein Mugabe
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  1. 1.University Bureau of ConsultancyUniversity of Dar es salaamDar es salaamTanzania