The role of accountability in determining the relationship between financial reporting quality and the performance of public organizations: Evidence from Vietnam

Abstract

Drawing on the new public management and agency theory, this study examines the mediating role of accountability in the relationship between financial-reporting quality and the performance of public organizations. The research model and hypotheses tested with a survey of 177 responses obtained from accountants and managers working in the public sector in Vietnam. Our analysis shows that accountability has a mediating role on the relationship between financial-reporting quality and performance, with significant implications for public organizations seeking to improve both their financial-reporting quality and their organizational performance with better designed systems of accountability.

Introduction

Public organizations are funded mainly through the state budget and, for this reason, are “accountable” to the public for their activities. The public sector in developing countries is now demanding strong accountability for public institutions, both at the central and local levels (Adhikari and Mellemvik, 2011). Developing countries have individual and distinguishing characteristics that may affect the control and evaluation of public accountability in the public sector, specifically, low institutional capacity, limited involvement of stakeholders, and relatively high levels of corruption (Kim, 2009). Rajib et al. (2019) have argued that there is a need for public-sector reform in developing countries if good governance is to be achieved.

New Public Management (NPM) and agency theory are relevant for understanding accountability mechanisms in public sector organizations. The NPM theory is a multi-dimensional concept (Hood, 1995). Core elements include various forms of decentralizing management of public services supply (e.g., the creation of autonomous agencies and devolution of budgets and financial control), increasing use of markets and competition in the provision of public services (e.g., contracting out and other market-type mechanisms), and increasing emphasis on performance, outputs and customer orientation. The Organization for Economic Co-operation and Development’s recommendations for financial transparency and increased efficiency in the public sector are in line with NPM theory (Arellano-Gault and Lepore, 2011). One of the characteristics of NPM is the formation of relatively autonomous organizations in the public sector, which are required to have comparatively large accountability for their tasks and achievements as reported up to higher echelons (Kalimullah et al., 2012). Agency theory has thereby become relevant to public-sector reform under the NPM framework (Boston, 2016). Accordingly, policymakers and public regulators seek to impose responsibility on organizations for their actions and seek reassurance that organizations are acting according to their assigned responsibilities. In the context of asymmetric information, the quality requirements for financial reporting are important in serving a need to assess decision-making in public organizations as well as their accountability to broader stakeholders (Krambia-Kapardis et al., 2016), thereby placing pressure on managers to operate public organizations in a more efficient manner. In this sense, financial-reporting quality appears to affect both the performance of public organizations and their accountability to broader stakeholders. However, Hepworth (2017) states that there is little empirical evidence with which to make an assessment of the International Public Sector Accounting Standards Board (IPSASB (2013). Additionally, Dubnick (2005) has argued that the relationship between accountability and performance is more superficial than real, and that researchers need to conduct further empirical studies to clarify this relationship (Christensen and Lægreid, 2014). We are accordingly motivated to pursue empirical studies in relation to the public institutions of developing economies to verify this relationship.

This study takes place in the context of Vietnam, which is transitioning from a centrally planned economy to a socialist-oriented market economy (Doan and Nguyen, 2013). Similarly to other developing economies, Vietnam retains problems such as low institutional capacity, a lack of transparency, and high levels of corruption (Tran, 2014). Thus, accountability and the transparency of financial information are expected to remain significant in achieving the reforms required for the country’s citizens (as external stakeholders) as directed by the organization’s leaders and civil servants (as internal stakeholders).

To this end, Vietnam has implemented a range of public financial reforms, most notably, the issuance of modern accounting regimes on a full accrual basis. The application of accrual accounting is common in developed economies (Kobayashi et al., 2016) and appears to have enhanced accountability in developing economies (Nakmahachalasint & Narktabtee, 2019). Vietnam together with developing economies in Southeast Asia, such as Thailand, Malaysia, and Indonesia, now prepares public-sector financial statements under accrual accounting. Policy makers in Vietnam envisage that due to providing useful information for decision making, financial statements in accordance with the new regulations will assist the authorities in assessing the accountability of public organizations. Nevertheless, the extent to which the financial statements created under the new accounting regimes are useful for evaluating accountability and improving operational results remains unclear.

This study therefore seeks to examine the mediating role of accountability in the relationship between financial-reporting quality and the performance of public organizations in Vietnam. In addition, the paper contributes to existing studies by clarifying the role of financial statements in determining the organization’s accountability, and provides empirical evidence of the effects of accountability on performance, while exploring the enhancement of financial-reporting quality and accountability as mechanisms for improving performance in the context of Vietnam’s public sector.