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Sequencing Government Performance Management and Accrual Accounting


July 15, 2013

Doug Hadden, VP Products

Many public financial professionals have a final reform goal in mind: performance management and full accrual accounting in public finances. This introduces the "mountain climbing" conundrum: it is fairly clear how to complete the final face of reform but unclear about how to get to the last base camp. Software systems, particularly legacy Enterprise Resource Planning (ERP) systems add a further constraint: difficulty in sequencing in small steps. (BTW: if you think that you've got modern technology in your ERP, you might want want to dig a bit deeper.)

Smaller stages in Public Financial Management (PFM) reform are almost always a better practice than a "big bang" to an end-state. Our view is that the most critical capability to enable this reform is the multiple year Chart of Accounts (COA). And, to not overly complicate the COA to make data entry difficult. Here are some two scenarios.

Support for Performance Management

Governments are transitioning from functional public accounting to management systems that use evidence and performance metrics. The following scenario shows typical intermediate steps, although the sequencing order and the amount of reform in a single phase could be different based on the country context.

Starting Point: Standard cash-basis of accounting, single commitment phase, typical functional design in the COA for fund source, organization and accounting objects.

  1. Augmentation of the COA to include "economic purpose" such as sector. This could be accomplished by inferring information from the organization and accounting object codes. Some governments design a separate segment for this or use a "program" segment.
  2. Addition of the "program" segment that shows programs, sub-programs and activities. This can be designed to include economic purpose. And, numerous government priorities for performance objectives can be reported through side tables or "reporting objects." These are different ways of rolling up the information to provide management information. For example, in Sierra Leone, expenditures related to MDGs can be reported. (This is also how Government Financial Statistics are reporting in most countries.)
  3. The program segment can be a bit dangerous to introduce, so valid code combinations are needed to prevent users from keying in expenditures in a program that is not part of their organizational unit.
  4. Although there is some debate about "program budgeting", it is clear that governments need to first associate budgets and expenditures to purpose prior to achieving any performance management capabilities. Performance management in the private sector doesn't require this strict connection between budget – purpose – actual expenditure in performance management.
  5. Development of a performance structure or logic map. Performance management is much more difficult in the public sector because there is no bottom line of profit. Therefore, performance initiatives take some time before they become effective. Many governments should consider outputs in performance first rather than outcomes. This means counting of objects bought or affected: i.e. the number of inoculations. (Outcome would be the number of incidents of disease, the satisfaction with the health system etc.)
  6. Output targets are placed in budgeting. (I know that output targets can create odd incentives and may not necessarily align with desired outcomes. For governments with capacity issues, outputs are easier to manage.)
  7. Alternatively, the government could consider outputs and outcomes on high priority areas such a public investment planning or specific sectors. This can build expertise in the performance management discipline where there is higher capacity and greatest need.
  8. Scorecards and dashboards should be delivered to provide management information to improve decision-making. Some governments will transition to a typical scorecard but the use of the balanced scorecard approach might be better, particularly in the public sector. The discipline of the balanced scorecard approach provides, in my opinion, better root cause analysis than simple metrics. Also, governments need to understand that there is a need to consider citizen, financial, internal processes and learning in order to improve performance.
  9. The transition to accrual accounting (next scenario) also helps provide performance insight.
  10. The ultimate goal is to be able to figure out the cost effectiveness of increasing a unit of output and a unit of outcome. This also shows whether public finances are not improving performance. All of this has to be in the COA.

Starting Point: Standard cash-basis of accounting, single commitment phase, typical functional design in the COA for fund source, organization and accounting objects.

First of all, if you want to start a fight among government accountants, present the notion that full accrual accounting in government is a "best practice" and all governments should support it!

  1. First intermediate step is to introduce modified cash accounting where expenditures and revenue is accrued at the end of the fiscal year only. This can be accomplished without too much disruption for data entry personnel because the accounts can be calculated based on accounts receivable and payable dates. New accrual accounts will need to be set up for this purpose. The main effort of accruing this information could be handled during a year-end closing period by those with proper training.
  2. Capacity building for accrual accounting will be required by many governments prior to moving to following stages.
  3. Intermediate step of introducing modified accrual accounting where all revenue and expenditures are accrued but assets and liabilities are not.
  4. Introduction of fixed asset management for new assets, possibly only "capital assets" of over a certain value. This includes tracking expected asset lifespan and personnel assignments. Asset depreciation can be calculated in the fixed asset software but not necessarily moved to the general ledger.
  5. Next stage of accrual accounting is to include fixed assets from the asset register.
  6. Subsequent stages include supporting all fixed assets, assets acquired prior to the fixed asset software, real property (that could appreciate in value), liabilities and contingent liabilities.
  7. Support of IPSAS standards in accrual accounting and reporting.
  8. Roll out of accrual accounting to all levels of government and to integrate with State-Owned Enterprises (that are typically running accrual accounting).

What is the asset – performance linkage?

Accrual accounting shows the true value of assets and tracks the full costs over time. For example, the acquisition of ambulances could improve health outcomes. But, the carrying costs including petrol and maintenance may show that there are more effective methods of improving that outcome.

Public Financial Management Good Practices Multiple Year Chart of Accounts by FreeBalanceGRP

Public Financial Management Good Practice GRP Reform Sequencing by FreeBalanceGRP

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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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