Indian Journal of Finance

Open Access Open Access  Restricted Access Subscription Access

Factors Affecting Contingent Liabilities in the Public Sector


Affiliations
1 Tshwane University of Technology, Private Bag X680, Pretoria, 0001, South Africa
2 University of Limpopo, Private Bag X1106, Sovenga, 0727, South Africa

   Subscribe/Renew Journal


Inappropriately accounted-for contingent liabilities could result in government departments having to make enormous payouts. The purpose of this study was to evaluate factors affecting contingent liabilities in the public sector, using the audited financial statements of four national government departments in South Africa as the data set. The four departments are Education, Correctional Services, South African Police Services, and Health. Data from 12 years, 2007/8 to 2018/19, for each department were analyzed. The paper applied a quantitative approach using positive accounting theory to explain accounting practices on the effects of litigation claims and intergovernmental payables on the departments’ contingent liabilities. In addition, a Spearman correlation analysis was used to evaluate factors affecting the contingent liabilities of litigation claims (LC) and interdepartmental payables (IP). The study results indicated a statistically significant positive relationship between litigation claims and interdepartmental payables. The results further confirmed that both variables significantly impacted the growth of contingent liabilities in the public sector. The benefit of this study is that determining the escalation and quantum of contingent liabilities may encourage government departments to implement policies that promote efficient management and accounting practices to contain and eventually reduce contingent liabilities accounts’ transactions. Achieving this will significantly reduce government departments’ unproductive cash outflows, measured in millions of rands annually.

Keywords

Contingent Liabilities, Litigations, Claims, Public Sector, Financial Loss, Financial Statements.

JEL Classification Codes : H83, K41, M41, M42

Paper Submission Date : December 30, 2021 ; Paper sent back for Revision : February 22, 2022 ; Paper Acceptance Date : July 18, 2022 ; Paper Published Online : December 15, 2022

User
Subscription Login to verify subscription
Notifications
Font Size

  • Allen, L. (2018). Accounting for contingent litigation liabilities: What you disclose can be used against you. Virginia Law & Business Law, 12(2), 321. https://heinonline.org/HOL/LandingPage?handle=hein.journals/valbr12&div=12&id=&page

  • Anderson, M. E. (2005). Talkin' 'Bout my litigation - How the attorney response to an audit inquiry letter discloses as little as possible. Transactions: The Tennessee Journal of Business Law, 7, 143. https://heinonline.org/HOL/LandingPage?handle=hein.journals/transac7&div=10&id=&page

  • Andrews, R., Ferry, L., Skelcher, C., & Wegorowski, P. (2020). Corporatization in the public sector: Explaining the growth of local government companies. Public Administration Review, 80(3), 482–493. https://doi.org/10.1111/puar.13052

  • Bachmair, F. F. (2016). Contingent liabilities risk management: A credit risk analysis framework for sovereign guarantees and on-lending? Country experiences from Colombia, Indonesia, Sweden, and Turkey. Available at SSRN. https://ssrn.com/abstract=2720713

  • Bachmair, F. F., & Bogoev, J. (2018). Assessment of contingent liabilities and their impact on debt dynamics in South Africa (MTI Discussion Paper No. 1). https://openknowledge.worldbank.org/handle/10986/29910

  • Brixi, H. P. (2000). Contingent government liabilities: Fiscal threat to the Czech Republic? Post-Soviet Geography and Economics, 41(1), 63–76. https://doi.org/10.1080/10889388.2000.10641133

  • Brixi, H. P., Ghanem, H., & Islam, R. (1999). Fiscal adjustment and contingent government liabilities: Case studies of the Czech Republic and Macedonia (Working Paper. 2177). World Bank Publications. http://www-wds.worldbank.org/external/default/WDSC.d/PDF/multi_page.pdf

  • Burnside, C. (2004). Currency crises and contingent liabilities. Journal of International Economics, 62(1), 25–52. https://doi.org/10.1016/j.jinteco.2003.07.003

  • Carini, C., Giacomini, D., & Teodori, C. (2019). Accounting reform in Italy and perceptions on the local government consolidated report. International Journal of Public Administration, 42(3), 195–204. https://doi.org/10.1080/01900692.2017.1423500

  • Cebotari, A. (2008). Contingent liabilities: Issues and practice. Available at SSRN. https://ssrn.com/abstract=1316713

  • Cenar, I. (2011). Accounting policies and treatments of contingent assets and liabilities in public institutions. Annales Universitatis Apulensis Series Oeconomica, 13(2), 231–240. http://oeconomica.uab.ro/upload/lucrari/1320112/05.pdf

  • Chambers, R. J. (1993). Positive accounting theory and the PA cult. Abacus, 29(1), 1–26. https://doi.org/10.1111/j.1467-6281.1993.tb00419.x

  • Coetsee, D. (2011). A comment on research frameworks applied in accounting research. South African Journal of Accounting Research, 25(1), 81–102. https://doi.org/10.1080/10291954.2011.11435154

  • Currie, E. (2002). The potential role of the government debt management office in monitoring and managing contingent liabilities. En: XIV Seminario Regional de Política Fiscal: compendio de documentos-Santiago: CEPAL, 2002, 89–105. https://repositorio.cepal.org/bitstream/handle/11362/34871/INT-2192_es.pdf

  • Ellwood, S., & Newberry, S. (2016). New development: The conceptual underpinnings of international public sector accounting. Public Money & Management, 36(3), 231–234. https://doi.org/10.1080/09540962.2016.1140974

  • Gapen, M. T., Gray, D. F., Lim, C. H., & Xiao, Y. (2004). The contingent claims approach to corporate vulnerability analysis: Estimating default risk and economy-wide risk transfer. International Monetary Fund. https://doi.org/10.5089/9781451854411.001

  • Harris, H. (2001). Content analysis of secondary data: A study of courage in managerial decision making. Journal of Business Ethics, 34, 191–208. https://doi.org/10.1023/A:1012534014727

  • Harrison, T. M., & Sayogo, D. S. (2014). Transparency, participation, and accountability practices in open government: A comparative study. Government Information Quarterly, 31(4), 513–525. https://doi.org/10.1016/j.giq.2014.08.002

  • International Financial Reporting Standards Foundation (IFRS). (2017). IAS 37 provisions, contingent liabilities and contingent assets [Online]. https://www.ifrs.org/issued-standards/list-of-standards/ias-37-provisions-contingent-liabilities-and-contingent-assets/

  • International Monetary Fund (IMF). (2014). Government finance statistics manual. https://www.imf.org/external/Pubs/FT/GFS/Manual/2014/gfsfinal.pdf

  • Irwin, T. C. (2022). Contingent liabilities: Monitoring exposures that are difficult to measure. In, The sustainability of Asia's debt (pp. 299–316). Edward Elgar Publishing. https://doi.org/10.4337/9781800883727.00021

  • Irwin, T., & Mokdad, T. (2009). Managing contingent liabilities in public-private partnerships: Practice in Australia, Chile, and South Africa. World Bank. https://www.infrastructureaustralia.gov.au/sites/default/files/201906/Managing_contingent_liabilities_in_PPPs_in_Australia_Chile_and_South_Africa_30_June_2009.pdf

  • Jain, D. K., Singh, R., & Patel, A. (2020). Mapping of sovereign risks in small island economies: An application of contingent claim approach to Fiji. Cogent Economics & Finance, 8(1), Article 1727158. https://doi.org/10.1080/23322039.2020.1727158

  • Joshi, H. (2021). Cash holding or net debt: What matters for firms' financial policies? Evidence from India. Indian Journal of Finance, 15(2), 8–21. https://doi.org/10.17010/ijf/2021/v15i2/157637

  • Kaur, H., & van der Laan, S. (2013). Auditing litigation and claims: Conflicts and the compromise of privilege. Australasian Accounting, Business and Finance Journal, 7(4), 3–16. https://doi.org/10.14453/aabfj.v7i4.2

  • Kayhan, ?. E., & Jenkins, G. P. (2016). Build-operate-transfer projects in Turkey: Contingent liabilities and associated risks (Development Discussion Paper, 2016-01). https://cri-world.com/publications/qed_dp_283.pdf

  • Kishore, K. (2018). Contingent liabilities in Indian banks an empirical trend analysis. Journal of Academic Research in Economics (JARE), 10(1), 143–157. https://www.ceeol.com/search/article-detail?id=713583

  • Kivunja, C., & Kuyini, A. B. (2017). Understanding and applying research paradigms in educational contexts. International Journal of Higher Education, 6(5), 26–41. https://doi.org/10.5430/ijhe.v6n5p26

  • Koprowski, W. R., Arsenault, S. J., & Cipriano, M. (2009). Financial statement reporting of pending litigation: Attorneys, auditors, and difference of opinions. Fordham Journal of Corporate & Financial Law, 15(2), 439–458. https://ir.lawnet.fordham.edu/jcfl/vol15/iss2/3

  • Kunz, S. N. (2015). From legally confidential to financially confident: Resolving the tension between lawyers and auditors over contingent liability disclosure (CMC Senior Theses 1073). http://scholarship.claremont.edu/cmc_theses/1073

  • Kuri, P. K., & Laha, A. (2011). Determinants of financial inclusion: A study of some selected districts of West Bengal, India. Indian Journal of Finance, 5(8), 29–36. http://www.indianjournaloffinance.co.in/index.php/IJF/article/view/72491

  • Lapsley, I. (1988). Research in public sector accounting: An appraisal. Accounting, Auditing & Accountability Journal, 1(1), 21–33. https://doi.org/10.1108/EUM0000000004618

  • Lassou, P. J., Hopper, T., Soobaroyen, T., & Wynne, A. (2018). Participatory and incremental development in an African local government accounting reform. Financial Accountability & Management, 34(3), 252–267. https://doi.org/10.1111/faam.12154

  • Lind, E. A. (n.d.). Litigation and claiming in organizations. Antisocial behavior or quest for justice? https://people.duke.edu/~alind/litagate.html

  • Milne, M. J. (2002). Positive accounting theory, political costs and social disclosure analyses: A critical look. Critical Perspectives on Accounting, 13(3), 369–395. https://doi.org/10.1006/cpac.2001.0509

  • Mitchell, J. D., Chia, C. W., & Loh, A. S. (1995). Voluntary disclosure of segment information: Further Australian evidence. Accounting & Finance, 35(2), 1–16. https://doi.org/10.1111/j.1467-629X.1995.tb00283.x

  • National Treasury, Republic of South Africa. (2013). Interdepartmental transactions and balances. https://oag.treasury.gov.za/Publications/14.%20Handbooks/Guide%20on%20interdepartmental%20transactions%20and%20balances%20-%20departments.pdf

  • National Treasury, Republic of South Africa. (2014). Guideline on fruitless and wasteful expenditure. http://www.treasury.gov.za/legislation/pfma/guidelines/Guideline%20on%20Fruitless%20and%20Wasteful%20Expenditure%2027%20May%202014.pdf

  • Oladokun, N. O., Abdullah, S. K., & Ayadurai, C. (2019). Determinants of off-balance sheet (OBS) activities: A case of selected retail banks in Malaysia. Asia-Pacific Management Accounting Journal (APMAJ), 14(1), 95–113. https://ir.uitm.edu.my/id/eprint/29366

  • Ozer, D. J. (1985). Correlation and the coefficient of determination. Psychological Bulletin, 97(2), 307–315. https://doi.org/10.1037/0033-2909.97.2.307

  • Pirdal, B. (2017). Main classifications of contingent liabilities. In, M. Aydin, N. S. Pinarcioglu, & O. Ugurlu (eds.), Current debates in public finance, public administration & environmental studies. IJOPEC Publication Limited.

  • Polackova, H. (1989). Contingent government liabilities: A hidden risk for fiscal stability. The World Bank. https://doi.org/10.1596/1813-9450-1989

  • Primorac, M., & Poljak, K. (2018). Fiscal risks of operations of enterprises owned by large cities. Occasional Publications, 1, 41–74. https://ideas.repec.org/h/osi/chaptr/18-03.html

  • Raipa, A., & Giedraityte, V. (2014). Innovation process barriers in public sector: A comparative analysis in Lithuania and the European Union. International Journal of Business and Management, 9(10), 10–20. http://dx.doi.org/10.5539/ijbm.v9n10p10

  • Schaeffer, M. S. (2002). Essentials of accounts payable. John Wiley & Sons.

  • Shobha, T. S., & Chakraborty, S. (2017). Psychological factors contributing to the financial well-being of an individual: A review of the empirical literature. Indian Journal of Finance, 11(10), 51–66. https://doi.org/10.17010/ijf/2017/v11i10/118775

  • Shukla, S. (2016). Performance of the Indian banking industry: A comparison of public and private sector banks. Indian Journal of Finance, 10(1), 41–55. https://doi.org/10.17010/ijf/2016/v10i1/85843

  • Sterling, R. R. (1990). Positive accounting: An assessment. Abacus, 26(2), 97–135. https://doi.org/10.1111/j.1467-6281.1990.tb00249.x

  • Thorat, U., & Roy, S. (2004). Contingent liabilities at the state level: The Indian experience. In, E. M. Favarro & A. K. Lahiri (eds.), Fiscal policies and sustainable growth in India. Oxford University Press.

  • Watts, R. L., & Zimmerman, J. L. (1978). Towards a positive theory of the determination of accounting standards. The Accounting Review, 53(1), 112–134. https://www.jstor.org/stable/245729

  • Watts, R. L., & Zimmerman, J. L. (1990). Positive accounting theory: A ten-year perspective. The Accounting Review, 65(1), 131–156. https://www.jstor.org/stable/247880

  • Waweru, N. M., Prot Ntui, P., & Mangena, M. (2011). Determinants of different accounting methods choice in Tanzania: A positive accounting theory approach. Journal of Accounting in Emerging Economies, 1(2), 144–159. https://doi.org/10.1108/20421161111138503

  • Williams, A. (2015). A global index of information transparency and accountability. Journal of Comparative Economics, 43(3), 804–824. http://dx.doi.org/10.1016/j.jce.2014.10.004


Abstract Views: 129

PDF Views: 0




  • Factors Affecting Contingent Liabilities in the Public Sector

Abstract Views: 129  |  PDF Views: 0

Authors

K. N. Motubatse
Tshwane University of Technology, Private Bag X680, Pretoria, 0001, South Africa
K. R. Chauke
University of Limpopo, Private Bag X1106, Sovenga, 0727, South Africa

Abstract


Inappropriately accounted-for contingent liabilities could result in government departments having to make enormous payouts. The purpose of this study was to evaluate factors affecting contingent liabilities in the public sector, using the audited financial statements of four national government departments in South Africa as the data set. The four departments are Education, Correctional Services, South African Police Services, and Health. Data from 12 years, 2007/8 to 2018/19, for each department were analyzed. The paper applied a quantitative approach using positive accounting theory to explain accounting practices on the effects of litigation claims and intergovernmental payables on the departments’ contingent liabilities. In addition, a Spearman correlation analysis was used to evaluate factors affecting the contingent liabilities of litigation claims (LC) and interdepartmental payables (IP). The study results indicated a statistically significant positive relationship between litigation claims and interdepartmental payables. The results further confirmed that both variables significantly impacted the growth of contingent liabilities in the public sector. The benefit of this study is that determining the escalation and quantum of contingent liabilities may encourage government departments to implement policies that promote efficient management and accounting practices to contain and eventually reduce contingent liabilities accounts’ transactions. Achieving this will significantly reduce government departments’ unproductive cash outflows, measured in millions of rands annually.

Keywords


Contingent Liabilities, Litigations, Claims, Public Sector, Financial Loss, Financial Statements.

JEL Classification Codes : H83, K41, M41, M42

Paper Submission Date : December 30, 2021 ; Paper sent back for Revision : February 22, 2022 ; Paper Acceptance Date : July 18, 2022 ; Paper Published Online : December 15, 2022


References





DOI: https://doi.org/10.17010/ijf%2F2022%2Fv16i12%2F172569