“ Evolution of the Governmental Accounting Reform implementation in Greek Public Hospitals: testing the institutional framework ” 34th Annual Congress of the European Accounting Association Rome , 20-22 April 2011 F. Stamatiadis and N. Eriotis National and Kapodistrian University of Athens Department of Economics
Public service organizations across the globe have been engaging in strategies of institutional, organizational and managerial change in order to cope with increasing demands for greater financial accountability, efficiency and effectiveness (Holmes and Shand, 1995; Hood, 1995).
As a result, many countries started to adopt financial accounting reforms on one or more levels of the government sector, by replacing or transforming their traditional budgetary cash accounting systems into accounting systems that support accruals
Within the context of NPM, the Greek government introduced the accruals accounting to certain sectors of government activity in order to modernize its accounting systems and to improve transparency and efficiency. The most important examples of the Greek public sector organizations in which several accounting initiatives took place are: Social Security Funds (1997), Public Law entities (1998), local government institutions and municipalities (1999) and public hospitals (2003).
The Greek institutional context is interesting because it can be characterised as a highly politically pluralistic and polyphonic environment when compared to Anglo-Saxon contexts.
The usage and quality of public accounting information, has lately become especially important for the Greek public sector since the end of 2009 after the revelation of the severe financial problems of the Greek economy.
The previous public sector reform literature calls for more systematic empirical research on the process of accounting change in public organizations entities (Pessina and Steccolini, 2007; Pettersen, 1999; 2001; Lapsley, 1991; Arnaboldi and Lapsley, 2004; Venieris et al., 2003; Windels and Christiaens, 2005) and particularly on the coexistence of accruals accounting with traditional, cash-based and budgetary accounting in order to generalize findings from previous case studies on the adoption and implementation problems of the governmental accounting reforms
In an attempt to promote efficiency, effectiveness and economy in health service production, the Greek government introduced in 2003 the accruals accounting that should work in parallel with traditional, cash-based accounting budgetary accounting in all public hospitals of the National Health System (NHS)
According to Pollitt (2002) the adoption of NPM practices and techniques, such as accrual accounting, can be categorized at four distinct stages: (1) disclosure, (2) decision, (3) practices, and (4) impacts of changes. Our study aims to fill this general lack of studies by investigating and evaluating the accounting reform implementation progress from an empirical point of view focusing on the practice stage of adoption process; that is in the way in which technical NPM innovations are used by public health sector organizations, including contextual and organizational factors that may influence the use and success of new accounting techniques in practice.
The purpose of this study is to obtain an overall idea of the reform adoption implementation in Greek public hospitals by identifying major areas of non-compliance with the mandatory legislative accounting framework and various organisational and human characteristics that influence the level of reform adoption within a broad institutional framework.
The assumption that is made is that while acknowledging that organizations are facing institutional conformity pressures to be legitimate due to the influences of various implementation factors they might formulate different strategic decisions in response to these institutional pressures and show different attitudes towards accrual accounting adoption, including non-compliance (Oliver, 1991).
The Greek health care system can be characterised as a mixed system in which a compulsory social insurance scheme and a voluntary private health insurance system co-exist. The GNHS was founded in 1983 by the Greek Law 1397/83
Health care expenditures in Greece are funded mainly through the central annual government budget (general taxation 30.4%), the numerous state insurance funds (compulsory employer and insured people contributions 25.9%), private health insurance schemes (voluntary payments 2.3%) and out-of-pocket payments (for the remaining 41.6%) . In 2008, Greece’s total spending on health accounted for 9.5% of GDP, above the median of 8.9% in OECD countries
Regarding the funding of the public health care system, the GNHS budget allocation is set annually by the General Accounting Office (GAO) of the MoF, - the central budget authority in Greece - and is based on historical figures. Taxes (direct and indirect general taxation), finance about 52% of all public hospital funding, whereas the remaining 48% is derived from a mixture of social security contributions and out-of-pocket payments (OECD, 2008).
There are three major categories of health care providers: (1) The GNHS (public hospitals, health centres, rural surgeries and emergency per hospital care) administered by the MHSC (2) insurance funds health services with their representative units and polyclinics (mostly established within the biggest Greek insurance fund called IKA) and (3) the private sector (private hospitals, diagnostic centres, independent practices, surgeries and laboratories).
Regarding secondary hospital health care provision, approximately 75% of hospital beds are in the public sector (67% in the GNHS) and 25% in the private sector. The average bed capacity for public hospitals is 233 beds and for private hospitals only 55.
Health care services in the public sector (mainly secondary and tertiary health care) are provided by 132 general and specialized public hospitals operating within the GNHS.
The initial efforts of introducing a financial and cost accounting system on an accrual basis in public hospitals in Greece commenced in 1997 and escalating in 2003 with the Presidential Decree 146/03 (P.D. 146/03).
The P.D. 146/03 enforced the mandatory adoption of an accounting system, based on accrual accounting principles, to all public hospitals that are part of the GNHS and established the necessary guidelines and accounting standards for financial reporting and cost system design. However, the previous cash accounting system was not totally abandoned but instead, public hospitals added the accrual based accounting system (ABAS) separately, as most of the budgetary accounting principles were maintained under the new approach (Venieris and Koen, 2004).
Accounting reform in the Greek public health sector (1)
The newly imposed accounting framework actually defined three accounting systems that would operate in parallel under three independent accounting cycles; the financial accounting cycle, the budgeting cycle and the cost accounting cycle (a uniform centre-based costing system), within the same general ledger.
The choice of placing budgetary and accruals accounting side by side is becoming increasingly common in continental Europe (Lueder and Jones, 2003; Pessina and Steccolini, 2007) and has also been adopted by the European Union (2005). Nevertheless, empirical analyses on the coexistence between budgetary and accrual accounting are still scarce.
Accounting reform in the Greek public health sector (2)
From an institutional theory perspective, understanding organizational change and responses to a regulatory reform is about understanding “ variations in response to the same coercive pressure ” from the state government. This can only be done by analyzing features of organisations that succeed to comply with the reform requirements and demands in both micro-level actions and wider external institutional influences (Windels and Christiaens, 2005).
RQ1: At what extent do public hospitals comply with the new accounting standards set out in the PD 146/03?
RQ2: Can the differences in the level of compliance with the new accounting legislation be associated on individual and organizational factors derived from previous and current research?
The sample surveyed included all the GNHS public hospitals
(MHSC directory 2009)
The research was realized in two phases
A structured postal questionnaire was constructed and send to 132 hospitals
A series of semi-structured interviews were conducted with six (6) senior financial and accounting executives randomly selected
The response rate was 71.21% ( 94 hospitals hotels)
The questionnaires were answered by hospital CFOs
Research Methodology Sample characteristics and data collection
Chi-square Test for non-response bias based on two demographic characteristics (health administrative region and size) are not significant
Research Methodology- Measurement of the variables Dependent variable
In order to quantify and measure the extent of reform adoption and success, the index Construction methodology is used to capture the diverse set and objectives of reform into an easily understood and comparable indicator. In particular, an (compliance) index was constructed to examine the level of compliance with prescribed accounting legislation and regulations demands.
Our index comprises 16 elements with each one measured dichotomously (e.g. Treatment of provisions, R ecognition of revenues and expences, calculation of depreciation, Valuation of accounts receivables , valuation of fixed assets etc).
The overall compliance index was calculated for every hospital as the sum of its scores in all dichotomous variables
Research Methodology- Measurement of the variables Ind ependent variables
CEO educational background ( CEOEDUC)
is measured using the years of business-oriented education (management and business administration issues, e.g. University degree , seminars, special courses, Master) to the total number of education years. This variable was adopted from Naranjo-Gil and Hartmann, (2007) and Pavlatos (2010)
General level of accounting staff education level (DEPTEDUC)
is measured by using the compound average of the level of finished studies (PhD, master, bachelor and secondary level) of the finance and accounting department staff. This variable was adopted from Windels and Christiaens, (2006)
Is measured using the natural logarithm number of beds of a hospital facility, adapted by Kimberly and Evanisko, 1981 ; Al-Omiri and Drury, 2007; Cardinaels, Roodhooft and Van Herck, 2004;
Experience effect ( EXPER)
is measured using the number of years passed of hospital first accrual based
financial statements issuance year
Research Methodology- Measurement of the variables Ind ependent variables
The other five independent variables (“ CONFLICTF”, “CONSUL”, “ITQUAL”, “TRAIN”, and “ORGSUP ”) required the use of perceptive measures and thus multi-question Likert-type five point scales (where 1 = to no extent and 5 = to a very great extent) were used to derive composite scores for each factor.
The construct validity and reliability for the multi-item variables were assessed by using a principal component analysis and Cronbach coefficient alpha.
All factors have coefficient alpha above the minimum level of 0.5 suggested by Hair et al. (1998) Indicating that are all reliable and reasonably valid, and, factor loadings above .40.
Data analysis Descriptive statistics for the independent variables
Research Findings – Results of the compliance Index The total extent of compliance scores range from a high of 87.5 per cent of the maximum possible score to a low of 6.25 per cent . On average, each organization reported a 50.53 per cent of compliance, a moderate to low compliance level with the prescribed accounting reform requirements-objectives of P.D.146 six years after its official enactment .
Research Findings – Results of the compliance Index The findings suggest that financial accounting items show relatively higher scores and have receive more attention from hospitals management than cost accounting items (i.e. Calculation of Fixed and variable cost, Definition of cost centres/pools/ objects and structure, Accurate and updated costing system ) . From an institutional point of view : first, one could argue that the financial accounting related items are receive more attention because they are probably related with some coercive pressure to comply and, Second, the low compliance scores of cost accounting items clearly indicate that public hospitals are merely trying to fulfil the new regulatory requirements in search for legitimacy than to actually improve their decision-making processes. In general, the empirical research findings indicate that the level of adoption and the quality of the new accounting reform in Greek public hospitals are realised only to a limited extent. These findings are consistent with Comerford and Abernethy ( 1999) and Hill (2000) that supported the low adoption level of cost accounting systems in private and public hospitals. They reported that hospitals traditionally had little incentive or demand for cost accounting systems to be used as a management control tool. Hospitals primarily reported to external funding authorities, such as the government, and therefore only served as external reporting factors.
Research Findings – Factors affecting the compliance level Hypothesis testing OLS Linear regression model was applied to test the hypotheses formulated : Y = a + b1 EDUC + b2 TRAIN + b3 ITQUAL +b4 CONSUL + b5 ORGSUP + b6 CEOEDUC +b7 CONFLICTF + b8 SIZE + +b9 EXPER + e Where Y = is the : is a variable measuring the level of regulatory compliance with the accrual financial and cost accounting reform
The differences in the level of compliance with accounting reform reveal that there are certainly some significant enablers and constraints in the process of organisational change
The level of compliance is significant positively associated with:
The level of reform specific training (p < 0.01),
The information technology quality (p<0.1)
The educational level of accounting department staff (p < 0.1),
The professional support of consultants (p<0.01)
Size, organizational support level, accrual experience, CEOs educational background, intra-organizational power relationships, hospital type and region were not found to be significant variables in our model.
Research Findings Explanatory factors (Executive perceptions-interviews) In order to discuss and fine-tune the stated findings of this research, additional interviews were organized with six CFOs of the examined public hospitals randomly selected. Nearly all of the interviewees claimed a rather formal adoption or passive acceptance of financial accrual accounting and that the legislative requirements were pointed as the main drivers for adoption. 1. First, t he Funding process continues to be appropriated on a cash basis. 2. Another reason for which public hospitals are not very concerned with the possibility of non-compliance with the coercively enforced change is the fact that they are evaluated and controlled on the basis of reports related to cash basis accounting (i.e. yearly budget and actual yearly amounts) and not to accrual basis accounting as the control mechanism is more appropriate to the cash accounting practice.
Research Findings Explanatory factors (Executive perceptions-interviews) 3. the lack of an effective enforcement mechanism to actually mobilize the implementation process with budgetary cutbacks or explicit financial restrictions and penalties in case of no compliance for cost accounting system adoption 4. Parallel operation of two accounting principles create ambiguity and confusion to accounting officers 5. The lack of accounting framework customization to the public sector’s needs, as was exactly the same as for the private sector, without taking into consideration the considerable differences of the public sector in general, and the public hospitals in particular 6. The lack of guidance from the relevant authorities in relation to the the implementation of Accruals accounting and especially of cost accounting.
Research Findings Explanatory factors (Executive perceptions-interviews)
7. Last but not least, nearly all of the interviewees responded that the implementation of the accrual basis financial and especially of the cost accounting system within their organizations was considered to be a difficult and time consuming task, and that they did not have the necessary organizational capacity and capability for action in managing the shift.
In particular, three categories of resources were highlighted as critical:
first of all a general concern about human resources – accruals accounting requires a large amount of work not only in the set-up phase but also in its routine operation (accurate data collection, gathering and processing the information, interpreting the results).
Moreover, the respondents commented on hospitals general lack of expertise in accruals, implying a need for the assistance of consultants.
The requirement of external expertise and of dedicated staff within the hospitals to adopt accruals accounting introduces the third fundamental practical obstacle: a lack of financial resources.
This runs counter to institutional theorists thinking that organizations are willing to incur substantial costs in the achievement of legitimation (Meyer and Rowan 1977).
Conclusions the present research reveals in practice that the level of accounting reform adoption in public hospitals is realized only to a limited extent and is restricted by both local organizational aspects and wider institutional influences (i.e. coercive pressure). Nonetheless, and contrary to the isomorphic influences (coercive pressure) observed in the case of accrual basis financial accounting adoption, institutional inertia or limited isomorphism seem to prevail as a tactical response to institutional pressures by the public hospitals in the case of cost accounting adoption. This finding is consistent with Institutional theory suggesting that organizations gain legitimacy by conforming to external expectations regarding new organizational and management practices in order to appear modern, rational, and efficient to external constituents, however, if a deviation from the legal expectations does not deliver the organisation a legitimacy problem, then institutional inertia or limited isomorphism is likely to prevail.
The findings of this paper seemingly suggest that the coexistence of budgetary and accrual accounting, at least in the version adopted by the Greek public hospitals, is not producing satisfactory results.
Greek public hospitals cannot be considered as best practice in the introduction of accruals accounting, or in public sector management. Nevertheless, their experience can be useful in better understanding the potential shortcomings of some accounting reforms.
However, this study contributes to the international literature of New Public Management (NPM) initiative s in public health sector by providing, to our knowledge, the first large scale assessment of accruals and cost accounting actual implementation in Greek public health sector. The empirical evidence of this study can enhance academics, practitioners and policy-makers understanding o f major implementation processes and challenges and thus help them refine models of effective implementation process and improve systems and processes on similar future projects.