Examining the Usefulness of Transport Infrastructure Accounting in Local Authorities

Robyn Pilcher

In Australia's largest state, New South Wales (NSW), 21st century public sector reforms have increased the pressure on local government to become more accountable and transparent. This, in turn, has had a significant impact on the reporting practices of local councils as they continue to struggle to implement full accrual accounting and asset management policies as well as satisfy a multitude of stakeholders. To examine the impact these reforms have had on the accounting practices of local councils in NSW, and provide a preliminary explanation of them, a longitudinal study covering a five year period (1998/99-2002/03) was undertaken. This provided the wherewithal to examine the usefulness of transport infrastructure accounting - specifically to answer the question: In what way does valuation and depreciation of local government transport infrastructure influence the bottom-line and the definitive nature of financial key performance indicators required by the Department of Local Government?

Building on past ideas of academics such as Thomas, Kaplan, Johnson, Sterling, Chambers and others, this thesis uses method triangulation - archival research is combined with multiple-case studies augmented by interviews and statistical analysis of the reporting practices of the population of NSW local councils. Dual theoretical frameworks are utilised. Underpinning the thesis is the following proposition:

The allocation of cost and depreciation to transport infrastructure by NSW local councils is dominated by financial issues and has little, if any, bearing on the efficient and effective management of these assets. In turn, a lack of regulatory guidelines not only allows selective misrepresentation to occur, but supports the claim by many, and in particular Thomas, that the minimum requirements for theoretical justification of an allocation method are not met.

A secondary framework is institutional theory. It facilitates a preliminary explanation for the observed evidence. Coercive isomorphism is posited as driving financial accounting dominance over management accounting in determining local council transport infrastructure reporting. By applying this theory in a local council setting, evidence is adduced that the theory is descriptive - with a slight twist. Namely, that a 'mismanaged isomorphism' is applicable where change (associated with the introduction of accrual accounting) did not have clear prescriptions or a priori target norms with respect to the reporting of transport infrastructure assets.

NSW was selected for a variety of reasons including:

  1. it is the largest state in Australia;
  2. there has been very little work done examining local council reporting of transport infrastructure in NSW by either academics or practitioners;
  3. its legislation is innovative and more abundant than that of other states in Australia, and finally,
  4. it was one of the first local government's in the world to introduce physical recommendations in the form of asset condition reporting into its legislation. Transport infrastructure was selected for two reasons.

Firstly, informal discussions with council staff had identified that a problem existed in the reporting of transport infrastructure and, in particular, road networks. Secondly, transport infrastructure accounts, on average, for 54% of a council's depreciable assets. Hence, any errors in its reporting are likely to have a significant impact on a council's profit and loss statement, its balance sheet and related financial key performance indicators (FKPIs). Concomitantly, inferences drawn from such flawed data are likely to effect detrimentally decisions taken by relevant parties to ensure council assets are replaced before they fail.

Examining virgin territory, this thesis makes five main contributions - theoretical and practical in nature. Generally, new evidence is provided about an issue that has been debated in private sector contexts, namely, that accounting practice (expressly the interface between financial and management accounting) has been overly influenced by financial reporting factors. Specifically, the first contribution is the revelation of inconsistent reporting practices both within and between all NSW councils with regard to valuing and depreciating transport infrastructure. This is shown to effect the reporting of FKPIs. The second contribution is the addition to knowledge and prior literature. Examining local council reporting practice, it complements works by authors such as Thomas (1977, 1974) and Chambers (1995, 1994, 1991, 1979, 1974) that claim financial accounting practice dominates that of management accounting. Evidence and analysis is provided to augment the prior claims of the irrelevance of depreciation as an asset management tool (see Pallot 1997, 1992; Sterling 1979, 1975; and Johnson and Kaplan 1987/1991). Financial misrepresentation (for example, Hillier and McCrae, 1998; Revsine, 1991; Copeland, 1968) and stakeholder influence are also discussed throughout. Further, a third, more practical contribution, is that the findings question the potential use of FKPIs for decision-making by a variety of stakeholders, including the State Government and other legislative bodies. Results reveal that actual reporting practices ? including derived FKPIs - are subject to misinterpretation because of accounting inconsistencies.

The fourth contribution is the recognition of the potential impact of KPI information on the council itself as well as its various stakeholders. Significant measurement problems, including the multiple valuation methods leading to problems of additivity, are identified resulting in a suspect framework analysis. The final contribution relates to the case study data and analysis. Interviewee comments support the earlier analytical results. They also illustrate the research potential of institutional theory frameworks such as those espoused by Ashworth et al. (2005), Brignall and Modell (2000) and DiMaggio and Powell (1983) to tease out why certain reporting practices are being used.

Statistically significant results were obtained indicating that up to 82% of councils were systematically under- or over-recording depreciation expense and up to 67% were failing to record a cost or depreciation expense for at least one component of transport infrastructure. As well, some support for the future testing of institutional theory and, in particular, the isomorphism stream was found. It was also discovered that FKPIs which included figures derived from the 'flawed data' were then used for decision-making purposes by various stakeholders.

Consistency in financial reporting between councils is significantly confounded by the absence of prescriptive direction provided by current legislation and regulations. Each council adapts its own interpretation of inclusions within the expenditure and revenue functions ... (Industry Commission, 1997, sub.60, pp.7-8).

It has been suggested that the absence of prescriptive direction in accounting standards, Treasury guidelines and related regulatory initiatives is a good thing (eg, Walker et al., 1999). This thesis contests whether this is the case in local government reporting. With council amalgamations occurring in NSW at a rapid pace in 2004 and beyond, incorrect accounting for transport infrastructure is increasing. This causes one to question whether public sector reporting reforms have been successful, given that the purported transparency does not include use of an accurate accounting process.


Professor Graeme Dean