Coping with ambiguity – 20 years of accrual-based accounting in Finnish local government

Accounting system, as any other humanly constructed artefact, is always embedded in the historical, cultural and political practices of organizations and society in general. This is also the case in Finnish local government.... [ view full abstract ]

Accounting system, as any other humanly constructed artefact, is always embedded in the historical, cultural and political practices of organizations and society in general. This is also the case in Finnish local government. Beginning of 1997 Finnish local government reformed their accounting system and started to use accrual-based accounting to the appropriate extend. The decision to use accrual-based accounting in Finnish local government was made to accomplish a more truthful view of local government performance simultaneously demonstrating the need for public finance more vividly. 20 years ago accrual-based accounting was also considered a panacea to the inefficiency problem of local government. However, this accounting reform has proved to generate new challenges rather than meeting the objectives or providing an answer to existing problems.

During the 20 years Finnish local government has shown unbalanced economies with crowing amount of loans while showing surpluses in the bottom line. The Finnish accounting system has gone through number of changes and amendments in order to account truthfully and reliably the local government economy and also to control Finnish local government economy (for instance, requirements to cover deficits). Hence, the case of Finnish local government demonstrates how historical and cultural circumstances have shaped and shapes the accrual-based accounting system. For instance, historically Finnish accrual-based accounting system is based on expense and revenue theory, originally created by Professor Martti Saario. This theory emphasizes the meaning of profit counting. The applicability of this accounting system to public administration can be argued.

In this paper, the aim is to study how actors in Finnish local government cope with challenges of the accounting system (research question 1) and how they use accounting information in talking about financial and economic situation of their municipality (research question 2). Theoretical frame is based on the concept of ambiguity holding a long tradition of bounded rationality. Here, the concentration is on ‘doing’ perspective of ambiguity rather than more studied ‘knowing’ problems. Also the concepts of organizational behavior and learning with reference to organizational culture are used in this paper.
This is a case study of Finnish local government. I believe that the Finnish local government illustrates an interesting case being one of the first local governments reforming their accounting system into an accrual-based accounting and having long experience with it. This case is portrayed with multiple empirical evidences including documents of financial statements, budgets, strategy documents, legislative documents, directions and regulation etc. and interview data. Interviews are conducted during spring 2017 and the interviewees are municipal managers and finance directors and municipal politicians and decision-makers. The Finnish case interestingly represents the difficulties with applying accrual-based accounting. Hence, more critical tone of voices are also heard for instance in the meaning of profit and loss statements or the bottom line.

Keywords: accrual-based accounting, ambiguity, local government, Finland