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Government Technology Implications


March 23, 2009

This is section 2 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.

There is a notion that government financial and human resource management is a variation of the private sector. Many observers argue that governments want to operate more like businesses. (Notwithstanding the current financial crisis.)  The discussion about Public Financial Management (PFM) can often be dominated by terminology from the private sector: “business rules”, “business process”, and “lines of business”.

It is true that government can leverage lessons learned from the private sector. The mission of governments differ from companies in many ways:

  • Governments focus on mission effectiveness and outcome results. Companies focus on competitiveness and profit.
  • Governments strive for accessibility to all citizens. Companies focus on one or more target markets.
  • Government priorities are set through the legislative process. Company priorities are set by managers and shareholders.
  • Governments strive for standardization across government entities. Companies strive for differentiation.

Public Financial Management


There are many similarities in financial and human resource management between the public and private sectors. For example, all modern accounting systems use ledgers and journals. Significant differences remain. These differences can be considered for any acquisition of a Government Integrated Financial Management Information Systems (IFMIS). Functional requirements can be more or less complex than the private sector.

System Set-Up

Element Private Sector Public Sector
Personnel Rotation Low High
Implementation Customization is almost always required by software tends to apply to many markets Customization tends to be less than private sector. Core financial functions are similar among governments and government tiers.
Adapting Focus in creating efficient and effective end state Modernization and reform: systems are constantly changed
Capacity Private sector tends to have high capacity knowledge workers. Public sector tends to have many lower capacity workers.

Budget and Commitment Management


Private Sector Public Sector
Chart of Accounts Typically includes object code, cost centre, organization segments Typically includes program, project, performance, object, responsibility, organization, fund segments
Budget Budget is a guideline for business Budget is the legal embodiment of government plans and policy.
Appropriation Concept is not usually relevant Authorization for government unit to spend.
Operating Budget types   Line item, program and performance.
Budget window Typically budgets one year in advance Typically budgets multiple years – medium term
Performance Performance outcomes are indicators that the company believes that improves bottom line: profitablity. Tends to be a simple relationship between indicators and profit. Performance outcomes are the bottom line. Multiple measurements are needed because there is no “bottom line” like profit.
Performance Linkage Financial indicators linked to financial indicators. Non-financial indicators are often not linked to financial indicators. All peformance indicators need to be in the COA because all financial and non-financial indicators need to be linked to financial outputs.
Outcomes Outcomes are mostly achieved within a fiscal year. Outcomes are mostly achieved in multiple years.
Budget Complexity Relatively simple Highly sophisticated with period controls, multi-tiered and budget variance analysis.
Budget Modifications Relatively simple According to the law, it can be very complex if it has to go to Parliament, because such budget in most coutries is a law.
Budget Preparation Relatively simple, often accomplished on spreadsheets. It can be very complex with different levels or approvals, laws and restrictions.
Budget Allocation Relatively simple It can be very restrictive in terms of conditions imposed by different fund sources (tax, donors, lons, etc.)

Financial Management

Element Private Sector Public Sector
Accounting Types Financial, Managerial, Cost and Tax Commitment, Managerial, Financial and Cost
Budget Execution Little notion of budget execution in the system .Budget execution and accounting functions fully integrated.
Emphasis Assess profitability Assess accountability and stewardship
Funds Rarely any notion of muti-fund accounting. Multi-fund accounting where each fund can have unique rules and controls.
Projects Special projects are typically completed in a year. Special projects are typically multiple year.
Commitments Commitments and obligations do not hit the General Ledger, so are not critical. Managers approve purchase orders .Commitments and obligations are critical to managing the budget of the government and determining forecast. Managers approve requisitions and purchase orders.
Expenditure Management Keep expenditures below budget. Cut costs and optimize revenue. Keep expenditures at budget levels. Spend to achieve expected program benefits.
GL Synchronization Budgets do not affect the General Ledger (above the line vs. below the line) GL need to be sychronized with budgets and commitments to ensure integrity
GL Posting Subledgers can be posted to GL at the end of the fiscal period – typically end of the month. Subledgers need to be posted immediately to the GL to show free balance and budget variance
Controls Managerial (approval), cash management. Segregation of duties. Budget, appropriation, commitment, managerial and cash management. Segregation of duties. Typically use “responsibility centre”. 
Control Detail If there are any controls, these controls are granular. Should be multiple controls for annual budget, warrants and cash management. Controls are aggregate.
Ledgers Support of General Ledger, Accounts Payable, Accounts Receivable and Payroll sub-ledgers Support of General Ledger, Accounts Payable, Accounts Receivable and Payroll subledgers
Multiple currencies Companies that operate in multiple countries have bank accounts in different currencies and treat cost centres based on the currency. Governments must operate with reporting currency because of country laws and IPSAS rules. Governments can operate with foreign currencies, but this must all be converted to the national currency
Statutory Reports Balance sheet, profit and loss statement, cash flow, changes in working capital. IFRS and GAAP dominate. Balance sheet, income statement, cash flow. IPSAS and GFS standards dominate.
Transparency To shareholders. Publically held companies provide reports based on securities laws. Company intentions kept private. All citizens are shareholders. Typical requirement to publish government intentions in detail, such as budget book, and to report full results. Includes need to report on economic activity.
Accounting Methods Must be accrual Can be cash, modified cash, modified accrual or accrual
Special accounting concepts Goodwill, revenue recognition   
Operational Management Focus on profitablility enables overspending to increase revenue. Cutting back on expenditures results from changes in economic conditions. Cannot overspend budget expect with special circumstances. Budget changes occur because of economic conditions.
Capital Expenditures Focused on maximum return. Governments have broad objectives. Maximizing return is often not the primary reason for capital expenditures.

Other Financial Requirements


Private Sector Public Sector
Asset and Liability Management Complex asset management, complex tax rules on depreciation, write-off Generally simple with depreciation functions However, contingent liabilities are much more difficult to characterize with any degree of certainty.
Revenue Complex sales processes Simple sales processes, highly complicated tax processes
Project Management Requirement for project accounting for some private sector organizations. Requirement for project accounting for some public sector organizations.
Procurement Can be informal or formal. Focus in on “spend management. Highly formal. Different purchasing vehicles and methods. Complex procurement processes. WTO and EU rules require publicizing tenders. Spend management is one objective. Some government procurement is aimed at economic development such as promoting local small businesses.
Audit External audit, need for compliance (i.e. SOX) Internal audit, usually a separate internal organization. Also extrenal audit by IFIs. Additional legislative audit requirements: travel expenses, civil service salaries, citizen reporting.
Grant Management Largest companies have foundations. Governments provide grants, contributions and loans. Multiple types of grants from simple eligibility to highly complex. Also complex post-award administrative functions.
Human Resources Budget forecasts not required. Budget forecasts required. Requires budget tracking and variance forecasting to prevent over-spending.
Payroll Only large companies have complex payroll. Complex payroll. 
Benefits Health, dental, pensions, bonus. Health, dental, pensions, loans, bonus.
Recruitment Different methods used. Recruitment highly regulated, need to be transparent.
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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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