Bahan Kajian EFAR



This chapter describes the background and the objectives of the study. The chapter begins with a brief discussion about new public management (hereafter NPM) as an international movement in public sector organizations in which contemporary accounting reform, i.e. the implementation of both performance based budgeting system (hereafter PBBS or simply PBB) and accrual and double entry local government  accounting (hereafter  accrual  accounting),  is  a  prominent  agenda  in achieving its objectives. Since the international proliferation of NPM closely relates to the phenomena of globalization and decentralization, this chapter also covers the historical setting of NPM and its association with both globalization and decentralization. The inclusion is important to give a clear understanding about the role  of  PBBS  and  accrual  accounting  systems  in  decentralization.  Finally,  this chapter discusses in detail the objectives and outline of the thesis.

1.0. Background of the Study

Within public sector literatures, NPM is also known as “managerialism”, “post bureaucratic”, “market based public administration”, “new public sector paradigm”, “accountingization”,  “new  paradigm”,  “marketization  of  public  sector”,  “public sector reform”, and also “privatization (Hood, 1995). The development of NPM where accounting reform is its central agenda closely relates to the advancement of globalization (Cope, Leishman, & Starie, 1997; Common, 1998; Farazmand, 1999; Guillen, 2001; Munck, 2002; Beeson, 2003; and   Klingner, 2004). Many authors argue that the progression of both globalization and NPM relate to the revival of neo liberal ideology (Farazmand, 1999; Larbi, 1999; and  Guillen, 2001). In parallel with the neo liberalists’ ideation of “freedom”, “individualism”, “free enterprise”, and “plural democracy” (Farazmand, 1999, p. 511), they believe that the role of the public sector should be minimal (Farazmand, 1999; Stiglitz, 2002; Fukuyama, 2003; and  Fiss & Hirsch, 2005); NPM is a reasonable template to achieve that goal. Thus, globalization and NPM create a common logic by which the current reality of public sector management is generally fabricated.

In general, neo liberalists continuously try to revisit purer capitalistic economic model and more liberal politics (Dixon, Kouzmin, & Korac-Kakabadse, 1998; and  Kouzmin, 2007). Thus, they idealize the market as single economic and social  mechanism.  In  the  public  sector,  they  infuse  their  ideological  doctrines through the public choice model of governance, where economics and positivistic methodological  principles  such  as methodological  individualism,  objectivity,  and moral neutrality are applied in the domain of non market decision making, i.e. politic and bureaucratic (Lane, 1995). Although the suitability of public choice and its claim of moral neutrality are still questionable beyond the western culture, as the mainstream ideological philosophy of the west, the public choice model has been promoted intensively by the IMF, World Bank, as well as USAID to be the only theoretical model of current public sector governance. Thus, to a large extent, NPM is indebted to public choice theory.

During the 1970s, Ronald Reagan in the USA and Margaret Thatcher in the UK  who  represented  the  “right  wing”  of  neo  liberalists,  both     contributed significantly in propelling the process of globalization. Through the Washington Consensus, globalization is used as a vehicle to liberalize the world for the interest of neo  liberalists  or  the  right  wing  conservatives  (Azam,  2005).  Common  (1996), Stiglitz (2002), and also Babbs & Chorev (n.d.), consider that NPM is a “global new right project”. In this context, public sector accounting reform, of which one of its main  goals  is  to  transform  the  public  sector  accounting  model  toward  a  more business-like  model,  was  viewed  as  a  reasonable  agenda  by  which  NPM,  in particular, and globalization, in general, can easily achieve their essential goal – creating “minimal states” all over the world through the implementation of privatization,   downsizing,   decentralization,   deregulation,   output   and   result orientation, cost recovery, and quality oriented in serving citizen as customer (Siddiquee, 2006; and  Ellwood & Newberry, 2007). According to Cope, Leishman & Starie (1997), neo liberalists strongly believe that the private sector and market system are the best places from which the public sector should seek valuable guides. Their well-known slogans include “private good, public bad”, “competition”, “decentralization”, and “fragmentation.

As a result of the Asian economic crisis in 1997, Indonesia has experienced a slumpy economy. Unfortunately, ten years after the crisis, when the economy of its neighbouring countries has recovered, Indonesia has been making tough working to free itself from the severity of the crisis. Although most of the driving factors of the crisis were identified as internal, some were also external such as globalization (Gill, 1998; Sangkoyo, 1999; Halim, 2000; Kristiansen & Trijono, 2005; and   Kuncoro, 2006). Compared to South East Asian countries, the Indonesian crisis was not only more pervasive in its scope, but also more devastating in every respect. It resulted in a multidimensional crisis.

According to analysts, the root of the Indonesian multi dimensional crisis relates mostly with the then weak Indonesian public governance (Gill, 1998; Tabalujan, 2002; Beeson, 2003; Hadiz & Robison, 2005; and  Davidsen, Juwono, & Timberan, 2006) such as a low level of transparency, a high level of corruption and a lack of “legal culture”. Based on that, post Soeharto Indonesian governments have set an agenda to reform the Indonesian public sector, including its governmental accounting, to restore its economic condition. Literatures on NPM such as Borins (1998) and Cheung (2002) demonstrate that, in general, the basic reason behind most Asian countries embarkation on NPM programmes are the motivation to have their institutions more responsive to global market demand, to curb corruption as well as to improve the quality, efficiency and effectiveness of the governmental agency’s services.

Unlike Singapore and Malaysia which reformed their public sector earlier and  in  a  relatively  more  controllable  situation  (Beaglehole,  1976;  Cheema  & Hussein, 1978; Ahmad Sarji, 1995; Halligan, 1995; Borins, 1998; Tayib, Coombs, & Ameen, 1999; Ang, Davies, & Finlay, 2001; Siddiquee, 2006; Othman et al., 2007; and Saleh, 2007), Indonesian public sector reform underwent a difficult situation where there were not many options available to do it independently.

The severity of the crisis led Indonesia to demand for the assistance of the IMF. As a standardized procedure, Indonesia was forced by the IMF to implement a set of prerequisite conditionality, generally claimed by the IMF to succeed in recovering the economy. One established agenda was for public sector reform. This is why the Indonesian public sector reform programmes resemble the programmes of other IMF beneficiary countries. Many critical observers, among others Farazmand (1999), Larbi (1999), Mayer & Mormouras (2005), Nis (2006) and Best (2007) are wary that the IMF really do it for the benefit of beneficiary countries. Normally, the IMF presets a standardized agenda of reform and leaves its beneficiary countries in a position with only limited choices. Hadiz & Robison (2005) critically demonstrate how  deep  the  IMF  and  World  Bank  have  contrived  the  Indonesian  attempts  to recover its economy in post crisis era. In their article entitled “Neo-liberal Reforms and Illiberal Consolidations: The Indonesian Paradox” (2005). They said:

“A second wave of market reform, more thoroughly influenced by neoclassical economics, followed the dramatic collapse of oil prices in 1982 and 1986. Technocrats were able to  push through a  series of  reforms in  trade, banking, finance and to eliminate many state monopolies as Indonesia’s state revenues and foreign earnings came under threat. But it was after the economic crisis of 1997–98 that neo-liberal reformers seized the policy levers in the most decisive way (italic added). With its economy and its currency in crisis, its corporate giants paralysed by debt and the Soeharto regime itself unravelling, the Indonesian government was forced to agree to extensive IMF demands for reform (italic added). These included more deregulation, dismantling the state owned sector, introducing institutional reforms in banking and public management and, significantly, diluting central state authority.” (Hadiz & Robison, (2005, p. 221)

Based  on  that,  it  is  understandable  that  a  combination  of  the  difficult internal situation and unpalatable external pressures had been colouring the complexity of the Indonesian contemporary public sector reform, either at the central or local government level. Put in a broader perspective, for example within the ASEAN  region,  these  causes  might  be  the  main  reasons  behind  Indonesia’s minimum result in achieving good governance as well as the lack of improvement in the public service.

1.0.1.  New Public Management in General

Given the fact that NPM has been popular since the 1990s as a relatively functional template for public sector improvement (Rosenbloom & Yaroni, 1992), and the fact that a large number of academics and professionals work in the area, it is quite surprising that its definition has not been generally conclusive (McCourt, 2002; and Siddiquee, 2006). Most literatures about NPM only mention the basic tenets or main characteristics. Among them are Rosenbloom & Yaroni (1992), Hood (1995), Behn (1998), Barzelay (2000), and also Gruening (2001). Therefore, NPM is essentially not a mono-interpretative, but rather a multi-interpretative term that flexibly covers any initiatives carried by the government of a country to transform its public/governmental sector to be more market oriented. Since the scope of NPM is so broad, various disciplines and perspectives can be used to analyse or study NPM. However, as pointed out by Siddiquee (2006, p. 339), the essence of NPM is “the application of private sector values and management tools in the public sector and the delivery of public services through market mechanisms”.

According to Gruening (2001), the origin of NPM can be traced back to the premiership of Margaret Thatcher during the 1970s in Britain. During the the 90s, other international donors such as USAID, ODA, CIDA, AUSAID, GTZ and also ADB (Osborne & Gaebler, 1992; Broadbent & Laughlin, 1998; Larbi, 1999; Broadbent, Jacobs, & Laughlin, 2001; Borins, 2002; Caramanis, 2002; Dawson & Dargie, 2002; Farlie & Fitzgerald, 2002; Roukis, 2006; Watkins & Arrington, 2007; and Babb & Chorev, n.d) also promoted NPM, particularly by including it as a component of their conditionality. Yet, Australia, New Zealand, and Canada are among intensive NPM adopters whose implementation models had been referred to by other late adopters internationally (Aucoin, 1995; Cope et al., 1997; Borins, 1998; Ball, Dale, Eggers, & Sacco, 2000; Gendron, Cooper, & Townley, 2001; Anderson, Griffin, & Teicher, 2002; Carroll & Steane, 2002; Barton, 2003; Carlin, 2003; Annisette, 2004; and Barton, 2007).

Meanwhile, a combination of strong neo liberal spirit, conservatism, supremacy in economy, military, media, and accounting or consulting firms, as well as the UK and the US domination in global institutions such as the IMF, World Bank, and WTO, had proliferated NPM more extensively, specifically post the Washington consensus in 1989 when the IMF and World Bank were more powerful in dictating their beneficiaries through their “conditionality”. Given that the number of such donors’ beneficiaries increased significantly around 1990s, the NPM as a model of public sector reform reached countries in Africa (Hope, 2001; McEwan, 2003; and Nze & Nikamnebe, 2003), Latin America (Barzelay, 2000), South and South East Asia (Ahmad Sarji, 1995; Cheung, 2002; McCourt, 2002; Turner, 2002; Hadiz & Robison, 2005; Tayler, 2005; Kristiansen & Santoso, 2006; and Othman et al., 2007), as well as Northern, Central and Eastern Europe (Bergevarn, Mellemvik, & Olson, 1995; Barlow & Röber, 1996; Monsen & Olson, 1996; Green-Pedersen, 2002; Luder, 2002; Schedler, 2002; Caperchione, 2003; Schedler, 2003; Frølich, 2005; and Reichard, 2006).

Conceptually, as mentioned by Hood (1995), NPM was initially an alternative of public administration paradigm (PAP). PAP was mostly applied in welfare states, and, – as mentioned – neo liberalists viewed the welfare state model of governance  as  irresponsive,  inefficient,  unproductive,  inflexible  and  ineffective (Behn, 1998). Originally, the emergence of NPM was to correct the PAP’s shortcomings (Beeson, 2003). Indeed, it wasnot only the PAP that was reformed by the NPM but also the model of public governance.

1.0.2. NPM implementation in Indonesia

Before the Asian economic crisis in the middle of the 1990s, Indonesia was one of the Asian Tigers after Malaysia, Thailand, South Korea, and the Philippine (Stiglitz, 2002). In citing Boorman and Hume (n.d.), even assert that the then Indonesian economic achievement was spectacular compared to Nigeria which commenced its development programmess at the same time and with almost similar characteristic in their economic starting point (Stiglitz, 2002). For Indonesia, the crisis had ruined not only its economy, but also its politics, social, environment, as well as legal culture. Therefore, from President Habibie’s era to date, the Indonesian participation in various parts of NPM was not comparable with those carried out by the UK, the USA, Australia, New Zealand, and – to a certain extent – even by Malaysia. The Indonesian approach to NPM resembles   what Larbi (1999) refers to as a “crisis state” approach to NPM. Among others, this approach is characterized by its serious attempts to speed up its economic recovery through various capitalistic and liberal initiatives such as decentralization; privatization, economic deregulation, as well as implementation   of   performance   based   budgeting   and   accrual   public   sector accounting.

Since the crisis is multi dimensional in nature, the reform to recover does not limit its scope to the economic sphere, but also covers such areas as politics, legal, as well as public administration. Accordingly, during the general assembly session of 1998, Majlis Permusyawaratan Rakyat (People Consultative Assembly) amended the Indonesian constitution in order to provide a legal basis for reforming the public sector. Three assembly statements (No. X/1998, No.XI/1998 and No. XV/1998) deal with the Indonesian public sector reform. First, statement No. X/1998 mandates  the  government  to  reform  development  programmes  to  revive  and normalize national life. Second, statement No. XI/1998 instructs the government to abolish the practice of corruption, collusion and nepotism.  Third, statement No. XV/1998 which contains a strong recommendation for the local government to implement principles of autonomy, good management, fair allocation and utilization of  national  resources,  as  well  as  the  accomplishment  of  fiscal  balance  between central and local government.

In its progression, the second statement has become the legal foundation for the decentralization agenda in contemporary Indonesia. Based on that statement, Habibie’s  administration  enacted  two  Indonesian  Laws  (Law  22/1999  and  Law 25/1999). These laws were monumental on two grounds. First, they introduced more discretion for local governments both in the domain of fiscal and public political privilege. Second, they are the main references for the entire agenda of contemporary Indonesian decentralization, including local government accounting and budgeting reform.

Furthermore, through President Instruction No.7/1999, President Habibie introduced a mandatory reporting to measure performance accountability of governmental agencies through a report known as LAKIP (Laporan Akuntabilitas Kinerja Instansi Pemerintah). The report requires any Indonesian governmental agency, including local governments, to prepare their programmes based on performance orientation as well as to report their performance achievement through LAKIP. Within this reporting scheme, Indonesian governmental agencies, for the first time, need to perform strategic planning through formulating statements of vision, mission and strategies to be used as the basis of their programmes and activities. Thus,   for   Indonesia,   the   introduction   of   LAKIP   could   be   claimed   as   a commencement of NPM. NPM is even understood more flexibly as any initiative to make public sector more responsive to the market.

In fact NPM had been introduced earlier in Indonesia. It was even before the enactment of the People Consultative Assembly’s statement XI/1998. The Indonesian government had introduced PAKTO 88, a deregulation policy package to relax the financial sector (banking) from previous policies. Thus, the embryo of NPM in Indonesia was introduced in 1988. However, only after the legislation of Law 22/1999 and Law 25/1999 in 1999, was the NPM significantly implemented in Indonesia.

Unlike the previous local government law (Law No. 5/1974), the Law No. 22/1999 offers wider discretions to local government. To a certain extent, it even seems to follow a federalist state model rather than an autonomy model within a unitary state. For instance, according to article No. 7 of the law, local governments have all the authority to manage governmental affairs except in areas of foreign policy, defence and security policy, monetary and fiscal policy, religious policy, and a number of special policies considered critical and strategic that remained in the jurisdiction of central government.

To improve the local government’s capacity in serving their local constituents, the new Indonesian governments, from Habibie’s administration until the current government, introduced legal regulations and policies in relevant areas. A document containing a joint agreement was made by the Minister of Home Affairs (MoHA) and the State Minister of Development Planning (SMDP) to specifically support the decentralization scheme. The document elaborates a number of initiatives that should be carried out under the decentralization programs. Among them are: (1) development   of   legal   regulations   needed   to   facilitate   decentralization,   (2) development   of   local   governmental   institutions,   (3)   development   of   local government personnel, (4) development of local government finance, (5) capacity building for local parliament, and (6) development of local and regional economy. It is easily understood that Local government accounting and budgeting are critical for supporting the fourth initiative. They are viewed as critical to enable local authorities to plan, execute and report their accountability to their stakeholders. In this regard, the Indonesian government followed it up by introducing PBBS and accrual accounting through Government Regulation (GR) 105/2000. Based on GR 105/2000, the Ministry of Home Affairs (MoHA) issued the Statement of the Minister of Home Affairs No. 29/2002 (domestically known as kepmendagri 29/2002) as the formal, more practical guideline to implement the GR. Accordingly, it is argued that the introduction  of  GR  105/2000  was  the  gateway  of  local  government  accounting reform in Indonesia.

Meanwhile, there are differences among NPM observers in using the term “accounting reform.” Andrews (2004), for instance, used it to epitomize the adoption of performance based budgeting (PBB) systems by the United States local governments. Caperchione (2003), Christiaens (2003) and Ryan (1999) employed the term to represent a change in local government accounting systems from cameralistic (cash basis) to a business-like model (accrual basis). However, they share a common understanding that the word “reform” connotes the newness, improvement, or implementation of an object having extensive impacts on the existing condition. Following that, this study uses accounting reform to indicate both changes, i.e. the change in local government accounting from single entry cash basis accounting to double entry accrual accounting, and the change from the traditional line item budgeting system to performance based budgeting system. The approach used by this thesis is strongly supported by the fact that these changes are legally backed by a similar set of Indonesian laws and regulations such as GR 105/2000, statement of MoHA  No.  29/2002,  Law  17/2003,  as  well  as  Law  1/2004.  Another  reason,  as pointed out by Othman et al (2007), is that governmental accounting is always a budgetary accounting. This is because no unbudgeted governmental transaction is allowed within a governmental agency. The budget is a legal instrument of the government to fund its activities. Thus, the governmental accounting system always facilitates budget preparation as well as recording and reporting budgeted financial transactions. Therefore, although initiatives to use PBBS could be clearly separated from activities relating to accrual accounting, in reality, both are so closely interconnected. The product of PBBS becomes the direct input of accrual accounting.

From  accountability  point  of  view,  PBBS  and  accrual  accounting  are deemed as basic tools for improving governmental accountability. The PBBS enhances accountability, effectiveness and efficiency of local government revenue generating, spending and investments at their planning stage, whereas accrual accounting is a part of internal control mechanism that protects governmental organizations from committing fraud. Accrual accounting is also believed to be the effective tools to ensure that the government will be more responsive to market demand or customers. Since accrual accounting is more auditable, it helps local government to disclose relevant information to interested parties so that the local government may obtain its political legitimacy.

It is implied that good governmental budgeting and accounting systems are not only optional, but are imperative. In the case of Indonesia, researching PBBS without  accrual  accounting  is  theoretically  possible,  but  it  is  not  practically beneficial. In the words of Guthrie, Parker and English (2003) as well as Broadbent and Laughlin (1998), the development of the current Indonesian local government accounting reform is in the threshold of “New Accounting,” an NPM product in the domain of public sector accounting which is philosophically based on “managerialism” and a strong orientation to accountability in the management.

1.0.3 Organizational Perspectives of Accounting Reform

The role of accounting in any organization is vital. Yet, its influence embraces various facets of organization. Meanwhile, the transformation from traditional and line item budget to PBB as well as the transformation from cash basis and single entry accounting to double entry and accrual accounting in the Indonesian local government is a real manifestation of accounting reform. Thus, it is speculated that such reform will result in an organizational changes within the local government organization. Senge (1999) as mentioned by Heller (2003, p. 416), defines organizational  change  as  a  combination  of  “inner  shifts  in  people’s  values, aspirations, and behaviors with outer changes in processes, strategies, and systems (p. 15)”. Thus, only change that entails a hybridization of the internal and external dimension of an organization can be recognized as organizational change. Alternatively,  as  mentioned  by  Jones  (2001),  organizational  change  is  “the movement away from a present state toward a future state.” Combining these two definitions, a new understanding can be obtained in which organizational change basically involves any movement or alteration from a certain state of organizational element, either in the inner parts of the people within the organization or the outer part such as the process and structure toward a desired new state.

Organizational   change   normally   interlinks   four   interdependent   areas; namely (1) human resources, (2) functional resources, (3) technological capabilities, and  (4)  organizational  capabilities  (Jones,  2001).  Consequently,  organizational change influences and is influenced by the quality of these four areas controlled by the organization.   It can be speculated, therefore, that when the accounting reform results in an organizational change, the final mode of change depends on the quality of these areas and their quality of interactions among them. To illustrate that the information, including financial information carried by budget and accounting, is powerful and the impact of its change is spectacular, Thompson and Miller (2003, p.329) argue that the change in the mode and quality of information usage was the responsible factor behind two revivals of capitalistic (market) world economy, i. e. in pre 1913 and the beginning of 21st century. They said:

“What  were  the  changes  in  technology  that  caused  bureaucracies  outperform markets? Here, the surprising answer is changes in organizational arrangements themselves;   that   is,   changes   in   organizational   design,   personnel   systems, operational engineering, accounting systems, and control technologies. This answer reflects  the  current  fashionable  view  among  economists  that  the  comparative advantage of institutional arrangements boils down to a question of information costs and that actual arrangement are solutions to information problems—the costs associated with search, bargaining, monitoring, and enforcement. Hence, transformations organizational arrangements must be largely driven by changes in information costs. (Basic texts on information costs include Arrow, 1969; Bazel, 1982; Milgrom & Roberts, 1992; Williamson, 1985, 1990.)”

According  to  this  statement,  the  mode  in  information  cost  (to  search, bargain, monitor, and enforce) that eventually determines the change in organization. The transformation into the new local government budgetary and accounting systems brought by the reform is to provide local government decision makers with more relevant, complete, accurate, in time, and transparent information about financial matters that needed in economic decision making such as information about the cost. The information produced is also useful for the legal responsibility settlement so that the organization will become more, effective, efficient and accountable. The change in efficiency, according to Thompson and Miller (2003) is a potential driver affecting organizational change.

Thus the successfulness in implementing budget and accounting puts local government in a better position to improve other areas. As these areas are interdependent, the success of accounting reform tends to produce organizational change. The values and practice such as transparency, competition, performance orientation, contracting out and the utilization of market price as the only fair measurement in exchange transactions of goods and services enforced by the reform are  assumed  to  be  an  effective  means  to  change  the  behaviour  and  culture  of adopting local government towards a more compatible condition with that demanded by NPM. However, within a reform adopter, some parties may be shocked by the introduction of these organization norms, values, and practices. At the individual organization level, their effectiveness as enablers depend on many factors such as current staff competency, culture, information literacy, and the legacy of the old institution.

Meanwhile, within NIS, or more exactly neo institutionalism (Greenwood & Hinings,  1996)  which  is  followed  by  this  study,  an  organization  can  not  be recognized merely as a technical or economical entity. It is social, cultural and political   (Carruthers,   1995).   Thus,   it   does   not   necessarily   follow  economic imperative for optimum efficiency. Since organization is surrounded by its environment, legitimacy from its environment, i.e. technical and institutional environment, is vital. However, the legitimacy is not automatically gained through acting rationally (efficiently). The most significant element of such legitimacy from institutional environment is organizational conformity to institutional environment characteristics. The more conformities shown by an organization to its institutional environment, the more legitimate the organization is.

Since   legitimacy   is   vital   for   organizational   life,   an   organization  is persistently in its attempt to gain its legitimacy by institutionalizing environmental elements (ideas, logics, practices, techniques, habits) into the organization so that they become its own institutions. In that, it resembles the characteristics of its institutional environment (isomorphism). Following NIS, institution is a rule-like reference for collective action in the organization (DiMaggio & Powell, 1991; and Jepperson, 1991). DiMaggio & Powell (1991) introduce three ways for an organization to become isomorphic with its institutional environment; coercive, mimetic, and normative. Whatever way is followed by an organization in adopting new element from its institutional environment, once it has been institutionalized as an institution, the institution takes the role of  stabilizer and harmonizer. It produces “normality” within the organization vis – a – vis its institutional environment. Thus, what is produced is stability and not organizational change. At this point, earlier new institutionalists  differ  from  later  institutionalists.  For  the  later  institutionalists, stability oriented is seen as an insufficient part of the theory that should be revived. The  earlier  point  of  view,  for  example,  can  be  understood  from  DiMaggio’s argument about institutionalism. According to DiMaggio (1991, p. 268), institutionalism:

“provides a one-sided vision of institutional change that emphasizes taken-for- granted, non directed, nonconflictual evolution at the expense of intentional (if boundedly rational), directive, and conflict-laden process that define fields and set them upon trajectories that eventually appears as “natural” development to participants and observers alike” (DiMaggio, 1991, p. 268).

The way an organization’s struggle to have new element from institutional environment as institution is labelled as institutionalization. According to Meyer & Rowan (1991), institutionalization is a social process by which an organization’s programmes, structures and policies obtain “rule-like-status” as legitimate parts of the organization. NIS assumes that institutionalization is rather static, non-mutually responsive and puts the organization on the passive side in confronting pressures from the institutional environment or organizational field.

This study does not completely follow such an opinion, but rather on later version of NIS works performed by Oliver (1991), Greenwood & Hinings (1996), Lawrence (1999), and Hoque (2005) which enrich NIS to be a powerful theory to explain the inner dynamics of organization during institutionalization. Since the institutional environment is assumed to be dynamic, while new elements from institutional environment continuously challenge the institutionalized element, as a result, there is a pressure to instil new elements while at the same time there is also the power to resist or to respond to the pressures in the best mode that organization can perform. Hence, institutionalization is the place where the power of creativity, innovation, and pioneering (entrepreneurship) which are coloured by internal conflict to create uniqueness, are confronted with institutional pressures that force organization to be alike (isomorphic). The final state resulting from this process is basically unique to an individual organization, at least in its degree of attachment to institutional environmental characteristics. In some cases, institutionalization may produce  a  highly  attached  (tightly  coupled)  condition  where  the  existence  of “window dressing” is minor. In other cases, institutionalization may result in a loose coupled (decouple) situation where the organization tries to show its conformity to institutional demand, not by performing substantial elements of such requirement, but rather going behind its artificial appearances. In line with such reasoning, instrumentality (or ceremoniality) of the institution within an organization depends on several factors, such as the way a new element from institutional environment is institutionalized by the organization, the internal characteristics of the organization such as its dynamics, and the availability of the institutional entrepreneur as well as its organization culture.

Until recently, however, a scientific gap has existed. First, there were only limited academic works exploring NPM in Indonesia. Most research in this area is not academic but parts of NPM official reports prepared by staff of international donor agencies like the ADB, IMF, the World Bank, GTZ, as well as CIDA. Some works in NPM utilizing NIS or institutionalism do existed, among others Covaleski & Aiken (1986), Carruthers (1995), Brignall & Modell (2000), Burns (2000), Burns & Scapens (2000), Modell (2001), Dollery (2001), Hussain & Hoque (2002), Covaleski, Evans, Luft, & Shields   (2003), Hoque (2005), Siti-Nabiha & Scapens (2005), Pedersen & Dobin (2006), James (2006), Elwood & Newberry (2007), Ezzamel, Hyndman, Johnsen, Lapsley, & Pallot (2007), and also Dambrin, Lambert & Sponem (2007). However, Indonesian scientific works in the area that employed New Institutional Sociology is nonexistent.

Secondly, the case study approach in Indonesian accounting studies is relatively new. It was not popularized before some Indonesian accounting scholars from Australian and British Universities pioneered it through various perspectives of qualitative research around 2000s. Academic works in NPM using case studies as their approach are still limited. Among others are the works of Wibawa (2002) and also Mahmudi & Mardiasmo (2004).

Thirdly, since the introduction of the processual approach in qualitative research,  as    pioneered  by  scholars  such  as  Pettigrew  (1997),  Dawson  (1997), Hinings (1997), Woiceshyn (1997), there have been only a few studies in accounting or NPM employing such approach, for instance Funnell (1998), James (2006), and Jones  (2006).  One  study  was  performed  by  an  Indonesian  (Kurnia  &  Johnston, 2000), but its locus of study was the Australian grocery industry. Strongly dominated by quantitative traditions, the qualitative approach, specifically based on case studies, do not appear to be so popular among Indonesian accounting researchers. In this context, this study can be as deemed to file this gap.

Fourth, since NIS is claimed to be unable to understand change in an individual organization, most studies employing NIS focus on the organizational field as their unit of analysis. Only after the publication of Oliver’s work (1991) in the Academy of Management Review which was then strengthened by the work of Greenwood & Hinings (1996) and Lawrence (1999), did accounting works employing neo institutionalism emerged. Among others are the work of Hoque (2005), and Ezzamel et al. (2007).

The following NPM studies in Indonesia are considered relevant. Alhough they are not necessarily similar in the approach or setting as this study, some are close   to   its   main   issue,   for   instance   those   performed   by   Bastian   (1998), Prodjoharjono (1999), Mardiasmo (1999), Imbaruddin (2003),   Afiah (2004) and Rosidi (2007). Prodjoharjono, investigates Indonesian local government accounting by employing Luder’s modified contingency model as the basis of analysis. Mardiasmo’s work (1999) explores the impact of Indonesian central and provincial government intervention on local government budgetary management, whereas Bastian (1999) studies about Indonesian privatization policies. Imbaruddin (2003) looks at the institutional capacity of local government in Makasar. Meanwhile, Afiah (2004) uses the non-parametric path analysis to examine the influence of local government apparatus and local parliament members’ competence, budgeting and accounting information system to information quality and good governance in West Java. The work of Rosidi (2007) connects leadership typologies, i.e. transformational versus transactional, with the success of managing performance based budgets in East Java local governments. None of them, however, employs the institutional theory.

There  are  three  other  Indonesian  NPM  studies  that  are  significant  and should be mentioned. First, the work of Wibawa (2002), which explores the implementability of NPM within Regency’s administration. Second, the work of Dwianasari, Ririn & Mardiasmo (2004) that investigates the effect of the relationship between the budgetary and decentralization structure on the managerial performance of local government agencies by treating organizational commitment as the intervening variable. Third is the work conducted by Mahmudi & Mardiasmo (2004). Instead of investigating the implementability of accrual accounting or performance based budgeting, this work looks at how the performance of local governments in the era of autonomy is empirically measured.

It is obvious that, from these nine studies, four are qualitative, i.e. Prodjoharjono (1999), Mardiasmo (1999), Bastian (1998), and Mahmudi & Mardiasmo (2004), while the other five are quantitative. From the qualitative studies, the work of Prodjoharjono is the closest one to this case study in term of the main issue investigated and the research approach or strategy employed.  The difference is the unit of analysis used in Prodjoharjono’s work. Although, the case organizations selected are limited to three districts (one in West Java, one in Kalimantan, and one in Celebes), they are deemed to represent Indonesia as a whole. This is because of his commitment to follow Yin’s comparative case model, placing his study as “rather positivistic qualitative case” where generalization remains as its orientation. The theory employed to inform the case is Luder’s modified contingency model. According to this model, there are basically four responsible factors behind the success or failure of a government’s innovation to shift its model of accounting towards accrual one. These are stimuli, expectation of change within information users as well as change behaviour within information producers, both of which are classified as structural factor, and implementation barriers (Luder, 1992). Consistent with this model, a government (country) is typified as more or less favourable to carry out accounting reform depends on the existence and the quality of those factors surrounding the reforming government.   Albeit these studies are scientifically valuable, however none of them applied institutional or processual approach. Due to the closeness of Prodjoharjono’s work (1999) with this case study, some excerpts from his work are presented below.

Employing Luder’s model, Prodjoharjono found that Indonesia is classified as an unfavourable place for successful accounting reform. The legal system, size of jurisdiction, lack of financial resources, and lack of qualified staff were claimed to be responsible factors behind such unfavourableness. Factors such as poor project coordination  and  heavy  intervention  by  the  Ministry  of  Finance  toward  the jurisdiction of the Ministry of Home Affairs were also identified as other responsible factors behind the failure of accounting reform conducted by the Ministry of Finance in 1985-1993 (Prodjoharjono, 1999).

This  study  is  different  in  many  respects.  First,  this  study,  using  the processual approach, it examines the process of Indonesian local government accounting reform from the New Institutional Sociology perspective. Accordingly, this study is not ahistorical. The temporal (time) aspects as well as spatial (place) aspects become important factors to understand the contextuality of the institutionalization of the reform. Second, rather than being based on survey, this study is designed as case study of a single organization, an Indonesian local government whose pseudo name is Ratan Ombo Regency (hereafter is known as ROR).  Since  2002,  the  case  organization  has  been  implementing  the  reform, therefore that the recency and the contextuality of the case are better as compared to post hoc studies conducted through survey.

1.1. Research Objective and Questions

The Indonesian local government accounting reform is a national agenda with a single implementation model, it is top-down, radical, and coercive. However, most of studies investigating the reform are quantitative in nature. In addition, none of them is based on NIS perspective or employed processual approach. As such, there is a lack   of   in-depth   knowledge   about   the   reform,   for   instance   regarding   the institutionalization process of the reform, or about the impact of the new systems brought by the reform on corresponding organization. Such issues need an in-depth investigation. Thus, an interpretive case study specifically investigating the institutionalization of the reform in a local government level is considered important to narrow the gap in such area of study.

Guided by the notion of neo institutionalism perspective, qualitative case methodology, processual approach, and the development of local government accounting reform in Indonesia as a form of NPM implementation, this study selects institutionalization of accrual accounting and performance based budgeting in Ratan Ombo Regency as the main issueto be examined. The main objective of this research is  to  get  an  in-depth  understanding  about  the  institutionalization  of  accrual accounting and performance based budgeting carried by the case organization. It is expected that through this study “the what”, “the how” and “the why” of the institutionalization of new local accounting and budgeting at ROR brought by contemporary Indonesian accounting reform could be well understood. In reaching such objective as well as to guide the way the research is conducted, a series of research questions are formulated as follows:

  1. Why has Indonesian Government reformed its local government accounting and budgeting systems? What are the characteristics of and the value underlying  the  Indonesian  local  government  accounting  and  budgeting reform?
  2. Who are the players behind the Indonesian local government accounting and budgeting reform?
  3. How is the reform viewed by focal parties in the case organization; and has it been institutionalized?

4.   Does the reform lead to organizational change?

This study is very significant both from the theoretical perspective as well as for practical reasons. First, this study fills the gap in the area of NPM, qualitative study, institutional perspective, and the processual approach in Indonesia with an Indonesian case which to date are few in number. Secondly, in the institutionalism context, it is also an attempt to extend existing opportunities of applying NIS at the individual organization level with recognition of the inner dynamics during institutionalization. The opportunity offered by this study in applying NIS at the individual organization level will be a valuable theoretical contribution for studies in accounting and management in general since the object of most studies is the individual organization level.

In the practical domain, specifically in the public sector area, this study significantly contributes contextual understanding about how new budgeting and accounting system are adopted and institutionalized within an Indonesian local government. Though it is not this study’s main purpose to generalize its findings, but recognizing that the situations taking place in ROR may resemble with what happen in other Indonesian local governments, such contextual understanding is very useful for other adopters. ROR’s experience may plot useful route for any late reform adopters to adopt a better strategy and approach in their journey of reform.

1.2 The Outline of the Thesis

This thesis consists of eight chapters, and is organized as follows. Chapter one is the introduction. In this chapter, the background of the study demonstrates empirical and theoretical analysis, which leads to the main problem of the research as well as research  questions,  research  objectives,  research  method  and  also  elaboration  of contribution from research. This chapter is concluded by a presentation of outline of the study.

Chapter two provides a literature review on two main related issues of this study, namely (1) New Public Management (NPM) and (2) accounting reform. The chapter briefly discusses the development of NPM in general, and as it goes further, the chapter embraces accounting and/or budgeting reform in particular. The applicability of accrual accounting and performance based budgeting in local governments is then discussed.

Chapter three discusses issues related to new institutional sociology (NIS). The opening part of this chapter discusses the core idea of NIS, which is followed by an extensive discussion of NIS, including the development of NIS, its relationship with Old Institutional Economics (OIE), Neo Classical Economics (NCE) and New Institutional Economics (NIE). This discussion is to construct a clear interconnectedness  between  various  strands  of institutionalism in  social  sciences influencing the position and the development of NIS. Since NIS is mainly concerned with the process of institutionalization, several extended new institutional theories are also considered by this study. Among them are the work of Oliver (1991) which introduces strategic organizational response typologies during the process of institutionalization,  and  the  work  of  Dillard,  Rigsby  &  Goodman  (2004)  that combines  NIS  with  Gidden’s  structuration  theory  to  identify  duality  in  the institutional process. After evaluating the superiorities and shortcomings of each, a logical justification for using NIS is provided.

Chapter four is designed to explore the research methodology. The chapter commences  by  a  discussion  about  the  differences  in  philosophical  background behind quantitative and qualitative research. The discussion is then continued by presenting a description concerning the interpretive approach by which this study is set. The emphasis is sociological views of interpretive approach or paradigm, its branches, its significant properties, and the implication affecting researchers when they use this particular approach to understand a certain piece of social phenomenon like the case of Indonesian local government accounting reform. Discussion about case methodology is also offered. The terms and concepts used are elaborated, while methods applied are presented by their justifications. This chapter is concluded by summarizing the research design employed in this study.

Chapter five describes the findings from the case study. At the outset, the chapter provides the background of the case. The differences between the old and the new systems in Indonesian local governmental budgeting and accounting are then discussed.  The  next  part  is  devoted  to  illustrate  how  the  new  systems  are implemented and institutionalized by ROR as the case local government, and also how historical and contextual factors inspire the process of the institutionalization. Conflicts as a result of opposition and cooperation from significant players (actors) are then identified. How they play their individual roles in resolving the conflict is also illustrated.

The theoretical analysis is provided in chapter six. This particular chapter is devoted to utilizing NIS as suggested by Powell & DiMaggio (1991) in particular, and Oliver (1991) as well as Dillard, Rigsby & Goodman (2004) to be the framework of discussing the case in the context of organizational change.

Chapter seven presents the theoretical analysis. The chapter discusses four main issues. First, the specific characteristics of theory usage in qualitative research tradition are outlined to have sufficient understanding about the differences between quantitative and qualitative research in using the theory. The chapter then continues to discuss three important issues, namely the rationale behind the accounting reform as well as the institutionalization of PBB and accrual accounting and also organizational change in ROR. The last three issues are basically themes covering most of the ideas that need to be obtained from the answers of the research questions. Though  it  is  not  in  its  focus  to  have  a  direct  analysis  as  normally  found  in quantitative research, this chapter is a significant part in the story of institutionalization of new budgeting and accounting in ROR brought about by the accounting reform.

Chapter eight is used to draw conclusions from this research with the beginning of the chapter recapitulating the study’s findings previously presented in the preceding chapters.  Contributions of the research both theoretical and practical are then explained and followed by limitation of this study and recommendations. The last part of this chapter is the conclusion.

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