Accountability, Financial Reporting and Performance Measurement

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Accountability, Financial Reporting and
Performance Measurement

• Andrew Graham
• Queens University
• School of Policy Studies

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Overview and Objectives

• Financial systems and financial information are
  changing to meet more demanding needs
• that link financial information with other
  non-financial data,
• that provide managerial information about
  operational performance and
• that provide public information about the
  organizations overall performance against its
  plan and in terms of its stewardship of public
  funds
• Government and public sector organizations are
  using a variety of tools to build better
  performance management.

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The Public Sector Accountability Landscape

• Governments are held to a higher standard of
  accountability than a business or a
  not-for-profit organization. CICA Handbook

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The Public Sector Accountability Landscape

• Accountability in the voluntary sector is
  multi-layer. It means accountability to different
  audiences, for a variety of activities and
  outcomes, though many different means. This
  multidimensional nature is the principal
  complexity of accountability in the public
  sector. VSI, Building on Strength..

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The word to watch (and never use) Accountabilism

• Yes, that combines the word-of-words these days,
  accountability, with cannibalism.
• Sound odd to you? Even been in front of a Public
  Accounts Committee in Ottawa or any province?
• David Weinberger (self_at_evident.com), coauthor of
  The Cluetrain Manifesto The End of Business as
  Usual (Perseus, 2000), defines accountabilism as
  the practice of eating sacrificial victims in an
  attempt to magically ward off evil.

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Drivers of Public Sector Accountability

• Transparency
• Multiplicity of accountabilities
• Hierarchical and horizontal nature of
  accountabilities
• Qualitative and quantitative
• Focus on both results and compliance
• Complexity

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What then is Accountability?

• Assignment of authority, power and resources
• Accountability for performance and results
• Assignment of duties
• Requirement to report
• Exercise of judgement on performance

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Individuals or Organizations Conferring
Accountability
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The Accountability Continuum
INTERNAL ACCOUNTABILITY EXTERNAL
ACCOUNTABILITY
COMPLIANCE
OUTPUTS
MANAGEMENT
OPERATIONS
OUTCOMES
Management Program Coefficients

Coefficients
Financial Information
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The Accountability Continuum - Comments

• Progression of accountability from day-to-day
  operations to full public accountability
• Information needs change along the way

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The Accountability Continuum - Comments

• Financial data is important at all stages, but
  often at different

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The Accountability Continuum - Comments

• Need in financial management to ensure that there
  is a flow of financial data from one level to the
  next to avoid overlap of systems
• Often operational information not well fed into
  financial data, leading the creation of black
  books systems that line managers need to
  control their resources separately from financial
  information systems that are more corporate
  i.e. oriented towards higher level upward
  reporting or external reporting

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The Accountability Continuum Data and
Information
OPERATIONS
MANAGEMENT

• Staff Activity Reports
• Clients Served, calls taken
• Routine Check Lists procedural safeguards
• Forms Completed
• Level of work versus standards - variance

• Cost Reports
• Cash Flow Reports variance against plan
• Attendance
• Per Unit Costs variances
• Overtime Used
• Period-to-Period Financial Performance

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The Accountability Continuum Data and
Information
COMPLIANCE
OUTPUTS
OUTCOMES

• Inspection Reports
• Financial Reports Balance Sheet, Income
  Statements
• Performance against standards regulatory,
  legislated
• Professional standards compliance

• Performance against plan or target
• Annual Reports
• Auditors Reports

• Socio-economic Indicators
• Evaluations
• Value for Money Audits

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Where Financial Reporting Fits In

• Public trust issues with public funds
• Fiduciary responsibilities
• Governing legislation on fund management
• Audit and inspection functions
• Financial information as a surrogate for
  performance data
• Absence of program data
• Issue of linking financial and non-financial
  results reporting

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Where Financial Reporting Fits In

• Equity did I get mine

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Users of Financial and Performance Information

• Citizens
• Media
• Interest groups
• Legislatures and boards of directors
• External oversight bodies

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Users of Financial and Performance Information

• Internal oversight bodies
• Central agencies of government
• Senior managers within agencies and governments
• Staff and clients of organizations
• Individual donors and funding organizations
• Creditors and credit-rating organizations

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Why all this reporting?

• To demonstrate accountability
• To permit users to assess the financial viability
  of an organizations
• To demonstrate compliance with legal requirements

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Why all this reporting?

• To demonstrate appropriate use of funds
• To provide information to permit evaluation
  operating results, including
• Source of funds
• Meeting objectives
• Changes in financial and operational conditions
• To assess the overall ability of the organization
  to meet its objectives

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Principles of Good Reporting

• Focus on a few critical aspects of performance
• Look forward as well as backward
• Explain key risk considerations
• Explain key capacity considerations

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Principles of Good Reporting

• Explain other factors critical to performance
• Integrate financial and non-financial information
• Provide comparative information
• Present credible information, fairly interpreted
• Disclose basis for reporting

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Basic Structure of Government Financial and
Performance Reporting THE CAFR Comprehensive
Annual Financial Report
BASIC FINANCIAL STATEMENTS
MANAGEMENTS DISCUSSION AND ANALYSIS
REQUIRED SUPPLEMENTARY INFORMATION - STATISTICS
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Basic Structure of Government Financial and
Performance Reporting THE CAFR Comprehensive
Annual Financial Report

• CAFR has many names and different ways of being
  presented Annual Report, Financial Statements,
  Performance Report

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Basic Structure of Government Financial and
Performance Reporting THE CAFR Comprehensive
Annual Financial Report

• Three elements remain the same set by accounting
  standards, but all form a complete picture
• financial data,
• performance data and explanations (MDA)and
• statistical supports
• Distinct evolution towards less detail on the
  financial side and more on the MDA side telling
  the story and linking to non-financial data is
  more important to improve comprehensibility,
  resulted from complaints by citizens and
  legislators that detailed financial data alone
  does not tell the full story

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Quality and Integrity of Financial Information is
Essential

• Elements that will ensure that financial
  information reports are accepted
• Use of GAAP for financial statements
• Use of GAAP for budgeting
• Use of CAFR format
• Receipt of an unqualified audit report appended
• Timeliness of information
• Effective use of ratios (in financial analysis)
  to determine the state of liquidity, debt to
  assets, debt to tax base

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Quality and Integrity of Financial Information is
Essential

• Increasingly, other factors also come into play
• Clear linkage to budget plans and outcome/output
  measures
• Comprehensible notes and explanations
• A logic model that links what the government
  does, the costs of the activity and the value (in
  public policy terms) it creates
• This logic model may be implicit to an
  experienced management team and governing body,
  or it may have been actually documented

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Quality and Integrity of Financial Information is
Essential

• Program definition structures that are reflected
  in statements of accounts for external reporting
  and internal management
• Credible accounting and information systems that
  will extract and summarize the financial and
  non-financial information
• A data capture and research capability that will
  ensure that all the key information requirements
  from internal and external sources are being
  captured with the frequency, reliability and
  accuracy needed for the intended purposes

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What does Integrating Financial Data and
Non-Financial Data Mean?

• A key stewardship issue for governments do they
  take the costs (all costs) into account when
  making decisions
• Goal is not only to put costs information and
  results information into the same overall
  reporting structure
• Goal is to relate one to the other

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The current operating environment within
government encourages managers to focus on the
amount of their original allotment of money left
to spend (free cash balance) and not on the full
accrual cost of their programs and activities. As
a result, full cost information is not considered
as important as cash expenditure information.
Auditor General of Canada, 2004
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What does Integrating Financial Data and
Non-Financial Data Mean?

• Assignment of costs move significantly off a
  line-item budget approach that assigns costs to a
  traditional set of cost drivers towards a program
  budget approach that links costs to results
• Effective alignment takes place over the entire
  budgetary cycle and over a number of years before
  it is useful for public discussion

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What does Integrating Financial Data and
Non-Financial Data Mean?

• Fully integrated reporting would show or explain
  
• How management bridges between annual costs and
  outcomes achieved over the longer term
• How funding levels were derived from decisions
  about goals
• Alternatively, how resource availability
  influenced the selection or achievement of goals
• The return on investment expected and achieved.

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What does Integrating Financial Data and
Non-Financial Data Mean?

• Phases in integrating financial and non-financial
  information
• Framework set program objectives, results
  defined
• Results aligned results described and measured
• Resources aligned costs associated with key
  results are assigned to them
• Integration relationship between resources and
  results are described and demonstrated

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Building the Bridge to Performance Measurement
and Reporting

• Performance measurement has increasingly been
  seen as necessary to complement enhanced
  accountability for agencies, departments and
  third parties
• Greater measurement is intended to provide an
  incentive for government service providers to
  become more effective and efficient.

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Performance Indicators Performance Indicators -
Examples Type of Indicator Definition
Example Input Indicator Measure of
Resources Equipment Needed Employed
Employees Required Supplies Used Output
Indicator Quantity of Service Number of
projects Provided Number of classes
Number of people served Effectiveness/outcome
The degree to which the Percentage increase
in Indicator intended objection of the
employment service is being met. Decrease
in crime rate Efficiency Indicator Cost per
unit of output Cost/liter of water
delivered by household Source Adapted
from Harry P. Hatry, 1977, How Effective are your
Community Services? Washington, D.C. The Urban
Institute
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Building the Bridge to Performance Measurement
and Reporting

• Traditional government accounting system normally
  was designed to respond to the accountability
  demands of society narrowly defined as being
  honest
• Old systems not designed to assist in achieving
  of more efficient and effective uses of public
  resources

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Building the Bridge to Performance Measurement
and Reporting

• We are in the midst of movement away from systems
  that simply encourage government to act honestly
  to ones that display uses of resources that are
  policy-based as well as end-result based
• New government accounting systems are generally
  now only one part of the ways that government now
  report
• New systems are designed to account for results,
  stimulate improved performance

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Building the Bridge to Performance Measurement
and Reporting - Examples

• Government of Canada Estimates now made up of
• Spending Estimates,
• Report on Plans and
• Priorities and Performance Reports
• Government of Alberta
• Consolidated Financial Statements, which provide
  an overall accounting of the Governments revenue
  and spending, and assets and liabilities.
• Measuring Up, which reports on the progress
  achieved on core government performance measures

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How Albertas Integrated Performance Measurement
Works

• The government's business plan is an ongoing
  three-year plan that focuses the government's
  efforts on three core businesses - People,
  Prosperity and Preservation.
• Goals are established for each of the cores
  businesses.
• To track progress in meeting goals, "core"
  measures are determined and targets set.
• Each year in Measuring Up the government reports
  to Albertans on progress made towards achieving
  the goals set out in the government business
  plan.

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How Albertas Integrated Performance Measurement
Works

• The intention is to focus on high-level measures
  that give Albertans a good overall indication of
  progress towards achievement of Alberta's goals.
• The core measures are like the gauges on the
  dashboard of a car providing the most essential
  information. Supplemental information on the core
  measures is also provided in Measuring Up to give
  citizens more information.
• Measuring Up includes an explanation on how major
  influences or external factors affected
  performance results. .

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How Albertas Integrated Performance Measurement
Works

• More detail on performance is provided through
  ministries' annual reports, which is the second
  tier of reporting to Albertans on performance.
• Each ministry prepares a set of "key" performance
  measures that relate to their business plan
  goals. These measures are reported in the fall of
  each year.

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Uses of Performance Measures

• Performance measures can be used in several ways,
  including
• Controlling costs - enabling managers to identify
  costs which are much higher or lower than average
  and determine why these differences exist.
• Comparing costs of similar services Ontario
  governments use of Adequacy Standards and
  introduction of performance standards in
  municipal governments

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Uses of Performance Measures

• Comparing processes - analyzing performance of a
  services performed with a particular technology,
  approach or procedure.
• Maintaining standards - monitoring service
  performance against established performance
  targets or benchmarks.
• Fulfilling external accountabilities to
  legislators, external review bodies,
  stakeholders, the public

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Understanding the Behavioral Elements of
Performance Management

• All data and information occur in a context
• Financial data is not hard and fast always
  subject to interpretation and attribution of
  meaning
• The movement towards adding elements of
  performance information makes this even more
  challenging, even though the goals are worthwhile

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Understanding the Behavioral Elements of
Performance Management

• Presentation of information, its quality and uses
  is very important elements of performance
  management
• To understand the environment in which the
  government managerial accounting system(s), it is
  necessary to uncover and understand the
  assumptions that affect the provider of the
  information, the public sector manager and the
  user(s) of the information
• Need to examine
• Organizational assumptions
• Participants/ Users behaviour
• Managers behaviour

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Understanding the Behavioral Elements of
Performance Management Organizational
Assumptions

• Legislation, regulation or directives prescribe
  organization goals when these are obscure,
  measurement is obscure
• Announced goals may be secondary to implicit
  goals hence measuring the wrong things
• Organizational goals may be subverted to the
  goals of a dominant member of the organization or
  subject to constraints imposed by other
  organizations
• In todays public sector, there is seldom one
  single organizational goal

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Understanding the Behavioral Elements of
Performance Management Organizational
Assumptions

• In complex public sector organizations
  (mega-departments), the formal goals of the total
  organization tend to be subjected to subversion
  by attention to the goals of the composite units,
  be they program-based or administrative units
• Qualitative goals more common to the public
  sector are harder to measure and invite the
  contribution debate to what extent did the
  organization contribute to what is being measured
  and to what extent did external factors influence
  the outcome

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Understanding the Behavioral Elements of
Performance Management Organizational
Assumptions

• In public sector, there is an equally powerful
  concern for efficiency and effectiveness as well
  as the program goals the how of spending and
  control remains highly relevant in the public
  sector
• There is an implicit assumption that the goals of
  various units within an organization contribute
  to the overall goals finding that linkage is a
  challenge at times.

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Understanding the Behavioral Elements of
Performance Management

• Organization participants are motivated by a wide
  variety of psychological, social and economic
  needs and drives these come into full play when
  interpreting information
• The extent of an individuals or groups
  participation varies directly with the expectancy
  of the achievement of his, her or its goals

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Understanding the Behavioral Elements of
Performance Management

• The efficiency and effectiveness of human
  behaviour and decision-making in a public sector
  organization is conditioned by
• The ability to concentrate on only a few things
  at one time,
• The concomitant inability to absorb large amounts
  of information whether in or out of
  multi-tasking mode
• Limited awareness of the environment
• Limited awareness of alternative and their
  consequences

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Understanding the Behavioral Elements of
Performance Management

• Incomplete and inconsistent preferences
• Limited information about the situation or
  information overload
• Incompatibility of objectives between the
  supplier of information and the receiver
• Differing views on organizations, roles and
  ideologies the bureaucratic model versus the
  advocacy model.

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Understanding the Behavioral Elements of
Performance Management

• The manager in the public sector is accountable
  for managing public resources and maximizing
  their use for program objectives.
• Balancing this is the continuous pressure on both
  program and support managers to use these
  resources effectively, efficiently and honestly.
• The willingness of other players to acknowledge
  and accept the dual managerial roles may be weak
  and inconsistent.

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Qualities of Good Performance Management
Information Design

• A clear understanding of the reporting entity
  information needs vary according to the level of
  the reporting and uses
• High-level corporate information for the
  executive or governing body
• Operational and specific information for
  operational management
• Program reporting on high profile initiatives
  that cross organizational lines

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Qualities of Good Performance Management
Information Design

• Ownership is in the hands of the user regardless
  of level on the continuum, the provider of the
  information (generally finance) should mold the
  report to the users language and needs

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Qualities of Good Performance Management
Information Design

• When standards or budgets are used, the report
  recipients should take part in their development

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Qualities of Good Performance Management
Information Design

• Design and use protocols for the information
  should be the result of mutual consent to the
  degree possible (external requirements,
  corporately-based reporting systems)
• The language of financial and performance reports
  should be positive but not Pollyannaish avoid
  spin

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Qualities of Good Performance Management
Information Design

• Reports should have a section for the comments of
  operating managers to give users more complete
  information
• Performance data should be reported against
  expectations and/or standards
• Variance needs to be clearly identified
• Information providers accountants, program
  managers should also be able to provide what
  if types of reports that offer the potential for
  improvement against standards or increases in
  efficiency

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Key Factors in How to Develop Good Measures

1. Measure the right stuff If you want to find out
   how healthy people are, you might measure
   hospital visits. But then, youd only find out
   how many are sick rather than healthy. To measure
   how healthy people are, its best to ask them how
   they feel.

Alberta Treasury Website www.finance.gov.ab.ca/me
asuring/aboutperfmas.html
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Key Factors in How to Develop Good Measures

• 2. Find the most accurate measures and use them
  consistently Its important to maintain
  consistency in what and how you measure. This is
  what gives us the ability to track trends and see
  the results of programs and services that are
  operated over the long term.
• 3. Report the results Good information is of no
  value if no one knows about it.

Alberta Treasury Website www.finance.gov.ab.ca/me
asuring/aboutperfmas.html
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In Conclusion

• Good financial management and good program
  performance are linked at beginning, middle and
  end
• Performance measurement poses many challenges
  that demand focus and attention not dismissal
• Comparisons are fraught with dangers and
  difficulties - they nonetheless offer many
  potential uses