Public Sector Financial Management For Managers

Public Sector
Financial
Management for
Managers
Andrew Graham
School of Policy Studies,
Queenss University
Kingston, Canada
November 2011
Acknowledgement
PublicSectorFinancialManagementforManagershasbeen
producedfortheCanadianGovernanceSupportOfficewith
fundingfromtheCanadianInternationalDevelopmentAgency,
GovernmentofCanada,asageneralguideforfinancial
managementforlinemanagersintheAfghanistanpublicservice.
ItcanbefreelyreproducedbyanyAfghanMinistry,Government
DepartmentorAgency.
PleaseacknowledgetheGovernmentofCanadainany
reproductions.
Usebyinternationalorganizationsrequirestheexpress
permissionofCANADEM.
CANADEM 2011
Public Sector Financial Management for Managers
Table of Contents
Section1:TheNatureofPublicSectorFinancialManagement......................................................1
KeyPoints....................................................................................................................................1
Question1:WhatisthePublicsector?.......................................................................................2
5KeyFeatures:................................................................................................................................2
Question2:WhatisFinancialManagement?.............................................................................3
8KeyFeatures:................................................................................................................................3
Section2:CornerstoneOne:AllocatingResourcesBudgets.......................................................5
KeyPoints....................................................................................................................................5
TheBudgetCycle.........................................................................................................................5
BudgetMethodologies................................................................................................................6
OrganizingBudgetInformation.......................................................................................................6
ProgramBudgetoftheOttawaGeneralHospitalforFiscalYear2005...........................................8
TraditionalBudgetingversusPerformanceBudgeting..................................................................10
Section3:UnderstandingtheBudgetaryProcess.........................................................................11
KeyPoints..................................................................................................................................11
BudgetsandPlanningCycles.....................................................................................................11
ElementsofanEffectiveBudgetCycle..................................................................................12
StrategicPlanningPhase.......................................................................................................12
CostAnalysisPhase...................................................................................................................13
TheRoleofRevenueinCostAnalysis...................................................................................13
HowtoDetermineCosts.......................................................................................................13
FixedandVariableCosts........................................................................................................14
GettingApprovaltoSpend:TheAppropriationProcess...........................................................14
CentralAgencyversusProgramOrganizations.....................................................................15
TheNewVersustheOld........................................................................................................15
ComplexityversusClarity......................................................................................................15
OnBudgetVersusOffBudget................................................................................................15
Conclusion.................................................................................................................................16
Section4:Budgeting:CapitalPlanning..........................................................................................17
KeyPoints..................................................................................................................................17
CapitalBudgets..........................................................................................................................17
CharacteristicsofCapitalAssets............................................................................................17
ToolsofCapitalPlanningandBudgeting...................................................................................18
CapitalImprovementPlans...................................................................................................18
TimeValueofMoney................................................................................................................20
PresentValueandFutureValue............................................................................................20
NetPresentValue..................................................................................................................22
RiskAssessment........................................................................................................................22
ExamplesofRiskCategoriesinAssessingCapitalAssetRisks.......................................................22
Conclusion.................................................................................................................................23
Section5:CornerstoneTwo:MonitoringMoneyManagerialControl......................................25
KeyPoints..................................................................................................................................25
WhatisManagementControl?.................................................................................................25
ManagementControlFramework.........................................................................................25
RiskandRiskManagement...................................................................................................26
UnderstandingandDefiningtheRisks.............................................................................27
ControlProceduresandPolicies............................................................................................28
WhoandWhentoControl...............................................................................................28
WhoistheController?.....................................................................................................29
TrustandEthicsinControl....................................................................................................29
Trust..................................................................................................................................29
Ethics................................................................................................................................29
ValuesandEthicsApproaches..........................................................................................30
ControllershipCapacityChecklist..............................................................................................31
StrategicLeadership.........................................................................................................31
ClearAccountability.........................................................................................................32
SharedValues&Ethics.....................................................................................................32
MatureRiskManagement................................................................................................32
IntegratedPerformanceInformation...............................................................................32
MotivatedPeople.............................................................................................................32
RigorousStewardship.......................................................................................................33
Section6:CashManagement:InYearControl.............................................................................35
KeyPoints..................................................................................................................................35
ObjectivesofEffectiveCashManagement,MonitoringandControl.......................................35
EstablishingaCashManagementSystem.............................................................................36
InyearBudgetDesignFactors..........................................................................................37
EstimatingWorkFlows.....................................................................................................37
UseofHistoricalData.......................................................................................................38
MonitoringFinancialPerformanceandVarianceAnalysis....................................................38
SettingupaMonitoringTimetable..................................................................................39
Governance......................................................................................................................39
PerformanceReports.......................................................................................................39
EastbrookCorrectionalFacility,Eastbrook,NovaScotia..............................................................39
Staffing:PlanversusActual...........................................................................................................40
VarianceReports..............................................................................................................40
ForecastedversusActualReport......................................................................................40
AnalysisofKeyVariancesReport.....................................................................................40
HistoricalInformation......................................................................................................41
HistoricalStaffingPatterns:CustodialOnly:YearAverage...........................................................41
ReallocationandReadjustment............................................................................................42
TheAuthoritytoReallocate.............................................................................................42
FreeingUptheFunds.......................................................................................................42
Conclusion.................................................................................................................................43
Section7:CornerstoneThree:ReportingOnHowMoneyIsSpentAccounting.......................44
KeyPoints..................................................................................................................................44
AccountingPrinciples................................................................................................................44
1.TheEntityPrinciple.......................................................................................................44
2.MoneyasaMeasure/theCostPrinciple.....................................................................45
3.TheGoingConcernPrinciple........................................................................................45
4.TheConservatismandCostConcept............................................................................45
5.TheMatchingPrinciple.................................................................................................46
6.TheConsistencyPrinciple.............................................................................................46
7.TheMaterialityPrinciple..............................................................................................46
8.TheDualityPrinciple.....................................................................................................46
9.TheAccrualPrinciple....................................................................................................47
TheQualityofInformation....................................................................................................47
TheOutputsofAccounting....................................................................................................48
TheAccountingCycle.......................................................................................................48
DoubleEntryBookkeepingandtheFundamentalAccountingEquation......................................48
DebitsandCredits.........................................................................................................................49
ExamplesofDebitsandCreditsTransactions...............................................................................49
Wherearetheseactivitiesactuallyrecorded?..............................................................................50
KeyDefinitionsofTermsUsedInFinancialStatements................................................................50
AnExampleofDepreciation..........................................................................................................52
Equity/NetAssets/FundBalance...................................................................................................53
TheBalanceSheet.........................................................................................................................53
TheIncomeStatement..................................................................................................................54
ByObject:salaries,benefits,rentals,costofservices...................................................................54
IncomeStatementOrganizedbyObject(PlusYeartoYearComparison)....................................54
TheStatementofCashFlows...........................................................................................54
Conclusion.................................................................................................................................55
Section8:AccrualAccounting:ProvidingaFullerStory................................................................56
KeyPoints..................................................................................................................................56
WhydoweneedAccrualAccounting?......................................................................................56
CashBasisAccounting:AnOverview.....................................................................................57
AnotherExampleofCashAccounting...........................................................................................57
ExampleofCashAccounting.........................................................................................................57
AccrualBasisAccounting:AnOverview................................................................................57
ExampleofAccrualAccounting.............................................................................................58
TheDifferencebetweenCashandAccrualAccounting........................................................58
CashVersusAccrualTreatmentofAssetAcquisitionandUse......................................................59
ImplicationsoftheAccrualAccounting.................................................................................59
AnExampleofaWeekintheLifeofOneGovernment................................................................60
FinancialReportsoftheGovernment...........................................................................................61
TheProsandConsofCashandAccrualAccountingandBudgeting.....................................62
ConclusionsandOverview........................................................................................................64
Section9:AccountabilityandReporting.......................................................................................65
KeyPoints..................................................................................................................................65
WhatisAccountability?.............................................................................................................65
TheRelationshipofAccountabilityandFinancialManagement...........................................66
TheUsersofFinancialandPerformanceReports.....................................................................67
TheObjectivesofFinancialandPerformanceReporting..........................................................68
TheRoleofAuditintheAccountabilityProcess.......................................................................69
InternalAuditFunctions...................................................................................................69
LegislativeAuditors..........................................................................................................70
Independence...................................................................................................................70
ReportingtotheLegislature.............................................................................................70
ThirdPartyAccountabilityandtheBurdenofOversight.................................................71
Conclusion.................................................................................................................................73
Section 1: The
e Nature
e of Public Secto
or Finan
ncial
Man
nagemen
nt
Key
y Points
TheP
Publicsectorrisresponsib
bleforbringgingtogetherlargeamou
untsofresou
urcesto
achieevearangeo
ofpublicgoo
ods.Thisresponsibilityccomeswithcconsiderableecomplexityy
andeexpectation.
esourcesem
mbracesman
nyelements,,people,tim
me,attention
n,focus,and
d
Whileethetermre
capaccity,inthee
end,eachoftheseinvolvvemoney.
Finan
ncialManage
ementisanimportantto
oolthathelp
psthePubliccsectortakeecareof
moneeyinasystematic,efficient,transpaarent,andlegitimateway.PublicsecctorFinanciaal
Manaagementhass3Cornersttones:
ResourceAllocation(GettingMon
ney),
ControlledDelivery(SSpendingMo
oney),and
Accountability(ReporrtingonMon
ney).
Accountingg:
A
Reportingg
andAuditt
Ressource
Allo
ocation:
Bud
dgeting
Co
ontrolled
Delivery:Risk
k
Maanagementt
Thesee3CornersttonesofPub
blicsectorFin
nancialMan
nagementcanbebroken
ndowninto
variousparts,wh
hichwillbeeexploredind
detailedthro
oughoutthissguide.Weccanbeginto
o
Public Secttor Financial Management
M
for Managerss
identifysomeofthecomponentsofthesethreebroadstagesbyaskingthequestions:
WhatisthePublicsector,andwhatisFinancialManagement?
Question 1: What is the Public sector?
Summary:ThePublicsectorneedstoworkwithinspecificfinancialboundarieswhile
tryingtosolveproblemsaffectingthecitizensitrepresentsandserves.
5KeyFeatures1:
i)ThePublicsectorisbroad.Itencompassesallorganizationsthatreceivetheirfunding
frompublicsourcessuchastaxes,feesorlicences.Therefore,itwillembracenotjust
governmentdepartments,butalsogovernmententerprises.
ii)ThePublicsectorhasmultiplegoals.Ratherthanhavingasinglebottomline,the
publicsectorhasseveral,whicharebeingpursuedatonce.
iii)ThePublicsectorusesvarioustoolstoreachitgoals.Thereareaseriesof
instrumentsusedtoachievethegoalsofgovernment2.
iv)ThePublicsectoroftenusesthePrivateSectortodeliverPublicGoods.Modern
governmentsfrequentlyusecontractswithprivatecorporationsasameansofacquiring
neededexpertise,outsourcingwork,orextendingtheirworkforceswhileseemingto
containthegrowthofthepublicservice.
Thiscontractedworkdoesnotmeanthattheregularpublicserviceisrelievedofits
accountabilityforpublicfunds.Governmentsdevoteconsiderableenergyto
administeringcontracts,especiallyduringaperiodofincreasedscrutinybythepublic
andbythecontractingcommunityinparticular.
v)ThePublicsectorisademocraticinstitution.Governmentsownnoneofthe
resourcestheyspend.Taxpayersdo.Inademocraticsociety,thewaysinwhich
governmentsspendresourcesmustbetransparentandreadilyopentoquestioning.
AccountingforPublicsectorfundsandtheirproperexpenditureisnotonlypartofgood
management,itisessentialtogoodgovernmentandgoodgovernanceofthepublic
enterprise.Itisalsowheregovernmentsaremostheavilyscrutinizedandwherethey
cangetintoagreatdealoftrouble.Suchscrutinyisoneofthebasisofagovernments
legitimacy.
CICAPublicsectorAccountingHandbook,RevisedUpdateNo.18,SectionPS1100,AppendixA
Salamon,LesterA,RethinkingPublicManagement:ThirdPartyGovernmentandtheToolsof
GovernmentAction,PublicPolicy29,no.1(Summer,1981)andSalamon,LesterAandMichaelS.Lund,
TheToolsApproach:BasicAnalysitcsinBeyondPrivatization;TheToolsofGovernmentActionedited
byLesterASalamon,..2350,Washington,UrbanInstitutePress,1989
2
Question 2: What is Financial Management?

Summary:FinancialManagementhelpstoprovidekeyinformationtodecisionmakers
anditintroducescontrolsthateitherpreventabuseorcreateincentivesforgood
servicetothepublic.FinancialManagementhelpsthePublicsectorcollectmoney,
allocatemoney,spendmoney,weighthecostsandbenefitsofcertainprograms,
accountformoney,reportonhowmoneywasspent,andplanforthelongterm.
8KeyFeatures:
i)FinancialManagementinvolvesthecollectionofmoney.ThePublicsectormakes
mostofitsmoneythroughtaxation,transfers,fees,thesaleofgoods.
ii)FinancialManagementinvolvesallocatingresources.TheincomeofthePublicsector
isnottiedtoanyonespecificgoal.Rather,Publicsectorfundsareconsolidatedintoa
ConsolidatedRevenueFund(CRF)andsubjectedtoademocraticdecisionmaking
processthatdistributesthemacrossarangeofactivities.Thisisknownasthebudgetary
process.Thereareexceptionstothisruleinwhichspecifictaxesorfeesaredirectedto
specificprograms.
ABudgettellsthepublichowthegovernmentintendstospenditsmoney.The
budgetaryprocessisaplanningtoolandatoolofregulationandcontrol.Agovernment
budgetsetsalegallimitforexpenditures.Italsocreatesthelegalauthorizationfor
delegatedofficialstospendfund.
ABudgetisalsothetoolbywhichthegovernmentsfinancialperformanceisjudged.
Managersareheldtoaccountfortheirperformancerelativetothebudget.
iii)FinancialManagementinvolvesspendingmoney.Delegatedofficialsareexpected
tospendpublicfundsforthepurposesforwhichtheywereallocated.Therefore,
financialmanagementinvolveshavingcontrolsinplacetomonitorexpenditures.
iv)FinancialManagementinvolvesoversightwatchingthemoney.Thegovernment
mustfrequentlyandsystematicallymonitorandreportontheflowofmoney.This
ensuresactualfinancialactivitymatchesplannedfinancialactivity.Financialrolesand
responsibilitiesaswellasfinancialreportingtimelines,areoutlinedinlawtoensure
specificindividualsarelinkedtothesuccessorfailureofaparticularstageinthe
financialprocess.Informationsystemssupporttheserolesbymakingpublicservants
awareoftheirlevelofprogress.
Legislationcreatingpublicorganizationscanbeverybroadwithrespecttotheamount
oflegislativecontrolthatisexertedastheorganizationgoesaboutitsdaytoday
business.Legislaturesseldomengageintheactualmanagementofpublicorganizations.
Rather,theyserveotherkeyroles:creatingtheorganization,settingoutthepolicies
thattheywillcarryout,providingthefundingtocarryoutthepolicies,holdingthe
organizationtoaccounteitherdirectlyorthroughexternalauditorsappointedbyand
responsibletothelegislatures.
v)FinancialManagementinvolvesaccountingformoneycollectedandmoneyspent.
ThePublicsectormustassurethepublicthatitsmoneyisbeingspentwell.Thismeans
theyneedtoask:
Ismoneybeingspentforanappropriateuseforthepublicgood?
Arefundsbeingallocatedforthestatedpurpose?
Arefundsbeingspentaccordingtotherulesthatapply?
Didthefundsachievetheintendedresults?
Canthefundsbetracedandidentified?
Canothersassessthefinancialinformationoftheorganizationexternalreview
oraudit?
Essentially,pastfinancialbehaviormustbereconciled,audited,andreviewedinrelation
tothebudgettogivethelegislatureandpublictheassurancesthatfundswerespentfor
theirintendedpurpose.Thepublicaccountsandtheassociatedfinancialstatementsare
themaindocumentsusedbygovernmenttoshowfinancialactivity.
vi)FinancialManagementinvolvestakingcareofassets.Publicsectororganizations
buildoracquirecapitalassets.Theyowncapitalassets,whichcanbeconsiderable,in
ordertodeliverservicesandthepublicgoodobjectivesthattheywanttoachieve.
Consequently,thePublicsectorhasconsiderablemaintenancerequirementsand
operationalcosts.Financialmanagersmustensurethatassetsareproperlypurchased
andsustainable.
vii)FinancialManagementdoesrequiredueregardforprocess,recordkeepingand
reporting.Therecanbeatensionbetweentheobjectivesofthepublicservicetoquickly
servetheneedsofcitizensandeffectivefinancialmanagement,seeingitasinhibiting
effectiveclientservicethroughexcessivecontrols,inadequatefundingora
preoccupationwithpaperwork.Nonetheless,theserequirementsremainessentialfor
propercontrolandaccountabilityaswellaspublicconfidenceinthegovernments
financialprudenceandhonesty.
viii)FinancialManagementisEverybodysBusiness:Oftenpublicservantsdonotsee
themselvesasmanagersofresources,butratheraspolicymanagersofhighly
specializedfunctions.BecauseofthecomplexityofthePublicsector,thefinance
functionwillhaveitsownseniormanagerswhoareoftenseparatefromlineor
operatingmanagers.Tensionsoftenensuebetweenthesetwocultures.Theseare
normaland,whenwellmanaged,healthyandnecessary.
Inreality,allmanagersarefinancialmanagers.Theabilitiestoobtainresourcesto
achieveprogramobjectives(budgeting),maximizeprogrambenefitswithinthebudget
(allocation),effectivelymanagethebudgettoachievefullbenefit(cashmanagement),
anddemonstrateresultsandprocessadherence(accountability),areimportant
managementskillsforallgovernmentemployees.
Section2:CornerstoneOne:AllocatingResourcesBudgets
Key Points
A budget is a time limited plan that puts resources in place to implement the
goalsofanorganization.
Forthepublicsector,abudgetisalegallyauthorizedannualmonetizedplanthat
establishesspendinglimitsforthevariousprogramsthatcomeoutoflegislation,
policy,andorganizationalintent.Abudget,therefore,doestwothings:
1)Ittranslatespolicyintentionintospecificactivitiesthroughresource
allocation.
2)Itisalsothebasisforfinancialcontrolwithinthepublicsectororganizationin
thatitarticulatesexpectationsofrevenueandexpenditures.Assuch,itisa
usefulbenchmarktocontroltheoperationsofgovernmentdepartmentsand
agencies.
Typically,aGovernmentwillhaveanorganizationwidebudget.
Thisdocumentwillthengetdividedintopartsinordertoformdepartmentbudgets.
And then those department budgets will be further divided in order to produce
branchbudgetsofvarioussorts.
Inthissection,wewillexplorethevarioustypesofbudgetsusedinthepublicsector.
The Budget Cycle
There are three budgets in play at all times for public sector managers: past, present
andfuture.
The manager has an immediate concern for the management of funds within the
currentfiscalyear.Thisistherealmoftheuseandcontroloffunds,cashmanagement,
andprogrammanagement.
However, the manger also has to continuously participate as part of the planning
processtosecurefundsforcomingyears.Thisistheexpenditureplanningprocess,the
policy planning cycle or the strategic exercises of the organization. This is for
developmentofthefuturebudget.
Finally, the manager must account for past use of funds. This is based on the past
budgetandthewayitwasspent.

Importantly,thisthirdbudgetlifethepastiscriticalsincesomuchofthebudgeting
process is incremental in nature, as changes are made in small increments based on
prior years levels of resources, e.g. an increase of 2% per annum with no change in
program fund distribution. Many organizations make the majority of their budget
decisions based on past performance and allotments. How much was actually used in
thepastisanimportantfactor.
Budget Methodologies
Core Elements: There are three core elements to a budget: revenue, operations and
capital.Thesearedescribedbriefly.
RevenueBudgets:Forthemostpart,governmentsmanagetheirrevenuestrategiesat
thewholeofgovernmentlevel,imposingtaxesandfees.Theythendistributemoneyto
departments through the budgetary and appropriations process. Individual managers
havelittletodowiththispartofthebudgetprocess,unlesstheyworkontherevenue
sideofgovernment.
Operating Budgets: Operating budgets describe the programs and resources used to
carrythemoutwithinaspecifiedperiodoftime.Theoperatingbudgetcontainstheplan
forrevenuesandexpendituresfortheperiod,usuallyreferredtoasafiscalyear.
In governmental terms, the expenditure plan represents the authorized limit of

expenditures for the operating unit.Most operating budget provide funds for such
elements as staff, benefits, supplies and operating expenses as well as grants and
disbursements.
CapitalBudgets:Capitalbudgetscontaintheplansandresourceallocationsforcapital
acquisitions..Theyreceivedifferenttreatmentthanoperatingfundsbecausetheiruseis
oftenamorecomplexandlongertermpropositionthantheoneyearoperatingfunds.
Theyofteninvolvecomplexplanningprocesseswithconsiderablefinancialriskandcash
outlay.
Land and buildings are wellknown capital goods. Increasingly, information technology
infrastructure is a part of the capital budgets. Determining what is and what is not
treatedasacapitalitemisamatterofpolicywithinpublicsectororganizations.
OrganizingBudgetInformation
Budgetsvaryconsiderablyincomplexity.Thiswilldependuponthepurposeforwhich
theywerecreatedandhowtheywillbeused.Inseekingthebestwaytodisplaybudget
information, there are three main approaches, each with useful intent as well as
limitations:
Lineitembudgets,
Programbudgets,
Functionalbudgetswhichcombinetheformertwo,and
Performancebudgeting.
Mostgovernmentpracticeallthreeforms,usingthemtomeetthevariousgoalsofa
budget.Forinstance,asimplelineitembudget,describedbelow,willmeettheneedsof
amanagertounderstandwhatresourcesshehasandforwhatkindofpurpose,e.g.,
staff,supplies,etc.Aprogrambudgetwilllinksuchinformationtotheprogramswithina
particularunit.Afunctionalbudget,averycommontool,combinesthelineand
programbudget.Aperformancebudgetwilllinkthemoneyallocatedtospecific
anticitipatedperformanceoutcomes,e.g.,pavingsomanykilometersofroadsforso
muchmoney.Eachisusefulinitsownturn.
LineItemBudgets:Thelineitembudgetisoneoftheeasiesttoprepareandoneofthe
mostusefulintermsofcontrolofbudgetswithinaspendingperiod.
The financial information is organized according to the types of expenses or cost

categories.Thesegenerallyfocusonstaff,supplies,rentals,andcontracts,allofwhich
canbecharacterizedascostsofoperations.
AsimplelineitembudgetfortheOttawaGeneralHospital,focusingonexpensesonly,is
shownhere.
Line-Item Budget of the Ottawa General Hospital for Fiscal Year 2005
Object
Budget
100. Salaries
$8,000,000
200. Supplies
2,000,000
300. Rentals
250,000
400 .Professional Fees

750,000
Total
$11,000,000
Themainorientationofalineitembudgetisexpenditurecontrolandaccountability.
Thisbudgetwillinformthemanagerorstakeholderswhatisbeingspentonwhatitem
ofexpenditure.Theseareknownasinputsinthattheyidentifythecategoriesof
resources,e.g.stafforsupplies,neededtodothework.Sinceitusescommonobjectsor
objectscodes,italsopermitsinterbudgetcostcomparisonsbetweenprogramsor
organizationswithsimilarfunctions.Agoodexample,ifallhospitalsusedthesame
objectcodesorlineitems,isthatitwouldenableaninterestedobservertodetermineif
theOttawaHospitalhadahigherstaffcosttooverallbudgetratiothananothersimilar
hospital.
ProgramBudgets:Programbudgetsarebudgetswhichareorganizedfordisplay
purposesaccordingtoprogramtypes.Itshowshowresourcesareallocatedtoeach
particularprogram.Thistypeofbudgetassignsresourcestotheoperatingunit,zone,
areaorspecializedprogramwithinwhichitisbeingspent.
ProgramBudgetoftheOttawaGeneralHospitalforFiscalYear2005
Unit
Budget
1.OperatingRoom
$4,000,000
2.Laboratory
1,000,000
3.Radiology
1,000,000
4.PatientCare
2,500,000
5.OutpatientCare
1,500,000
6.Administration
1,000,000
Total
$11,000,000
FunctionalBudgets:Afunctionalbudgetisabudgetthatcombinesthelineitembudget
withtheunitbudgettoprovideamorecompletepictureoftheresourcedistribution
withinanorganization.
Thisisoftentheformatthatisusedforexternalreportinginformation.Ithasthebenefit
ofallowingabetterbasisforcomparisonamongunits.Forinstance,oneareamayhave
highsalarycosts,e.g.operatingroomwhileanother,e.g.,administration,maybelower.
Thatmayreflectthelabourintensityoftheworkorthesizeoftheunitaswellasthe
costoftheprofessionalandsupportstaffineachunit.
Thefunctionalbudgetdeliversabetterunderstandingofwhatfundsaretobespentfor.
Itcombinesinformationaboutinputsandunitsorprogramsthatarebeingfunded.
BelowisadisplayofthefunctionalbudgetofOttawaGeneralHospital.
FunctionalBudgetoftheOttawaGeneralHospitalforFiscalYear2005
Unit
1.Operating
Room
2.Laboratory
3.Radiology
4.PatientCare
5.Outpatient
Care
6.
Administration
Total
100.Salaries
200.Supplies
300.Rentals
400.Professional Total
Fees
450,000
4,000,000
3,250,000
250,000
50,000
550,000
350,000
25,000
75,000
1,000,000
450,000
450,000
100,000
1,000,000
2,000,000
1,200,000
400,000
175,000
0
25,000
100,000
100,000
2,500,000
1,500,000
475,000
325,000
50,000
100,000
1,000,000
7,925,00
2,000,000
150,000
925,000
11,000,00
PerformanceBudgets:Performancebudgetsareintendedtolinkresourcestothe
resultsdesiredfromaprogram.Whilealineitembudgetisfocusedentirelyoninputs
andazerobasedbudgetgoesbacktobasicsandreinventsitselfeachyear,the
performancebudgethascertainfeaturesthatmoveitmoreintotherealmofpublic
sectoraccountabilitywithagreateremphasisonoutcomesandresults:
1. thereismeasurementofthegoodsandservicetobedelivered,
2. unitcostsaredeveloped,
3. budgetfiguresaredevelopedbasedonthelevelofserviceasdeterminedby
multiplyingtheunitcostandlevelofservice,
4. expectedoutputsarereportedwithinthebudget.
Theperformancebudgetisdesignedtoprovideaclearerpictureofwhatlevelofservice
istobeprovidedforhowmuchmoneyandwithwhatresults.Anexampleofthiswould
betoaddadditionalinformationtotheOttawaHospitalbudgetdocumentsthatoutline
someofthefollowingoutcomes:
a. numberandtypesofoperations,
b. waitingtimesforoperations
c. costperoperations
d. overheadcostsasapercentageofoverallbudget
e. changesinservicelevels.
Theperformancebudgetisagoodsteptowardscostingofservices,identifyingclearly
servicelevelsofcurrentresourcesandhelpingdecisionmakersmakeabetterlink
betweenthosetwowhendeterminingfutureresourcing.

TraditionalBudgetingversusPerformanceBudgeting
TraditionalBudgeting
PerformanceBudgeting
BudgetOrientation
MoneyControl
Linkingmoneytoprogram
andactivities
AppropriationControl
Department
Program
Level
BasicBudgetingUnit
Object,objectcodeorline Activity
item
EfficiencyMeasurement
None
Unitcost,volumes
ResultMeasurement
None
Programlevels,activity
(Effectiveness/Quality)
levels
BudgetPeriod
Oneyear
Ongoingyearoveryear
Someofthekeyelementsofperformancebasedbudgetsare:
1. servicesaredefinedandmeasurescreatedforthem,
2. disaggregatingofservicespermitsindividualcostingandthedevelopmentof
workloadmeasurements
3. servicestandardsaredeveloped,
4. thereisastandardizedcostingmethodology,
5. unlikeotherbudgetformats,therewillbeaconsiderableamountofnarrativeto
explainservicelevels,how
6. theyarecostedandhowcostsaredistributed,
7. someformofbenchmarkingisinvolved:thisprovidescomparativedataofcosts
andworkloadlevelsinsimilarcircumstance,e.g.comparingthecostofgarbage
collectionfromonetowntoanother.
10
Section3:UnderstandingtheBudgetaryProcess
Key Points
Agoodbudgetprocessisfarmorethanthepreparationofalegaldocumentthat
appropriatesfunds.
Goodbudgetingisabroadlydefinedprocessthathaspolitical,managerial,
planning,communication,andfinancialdimensions.
Agoodbudgetprocessischaracterizedbyseveralessentialfeatures.Agood
budgetprocess:
Incorporatesamediumtermperspective
Establisheslinkagestobroadorganizationalgoals
Focusesbudgetdecisionsonresultsandoutcomes
Involvesandpromoteseffectivecommunicationwithstakeholders
Provideincentivestogovernmentmanagementandemployees
Thesekeycharacteristicsofgoodbudgetingmakeclearthatthebudgetprocessisnot
simplyanexerciseinbalancingrevenuesandexpendituresoneyearatatime,butis
strategicinnature,encompassingamultiyearfinancialandoperatingplanthat
allocatesresourcesonthebasisofidentifiedgoals.
Budgets and Planning Cycles

Arrivingatthefinalbudgetwillentailsomemeasureofforecasting,analysisofoptions,
settinginplaceplansoverthelongtermandfinallyassigningresourcelevels.Thisisthe
budgetcycle.Understandinghowitworksisessentialforapublicsectormanager.
Budget cycles tend to be portrayed in calendar form. Below is a typical public sector
budgetcycles.
11
PllanningtoPlan:
EsstablishSystem
Vision,Mission,
Values,Legal
Mandate
LearninggandInput
toNeextYear
Goalsand
Ojbectives:
Measures
Review,Auditand
R
Evaluation
Performance
Monitoring
Lin
nkto
Costs//Budget
Operational
on
Implementatio
andControl
Appro
ovalby
Goveerning
Body/M
Minister
ElementsofanEEffectiveBud
dgetCycle
Itcreatesaco
ommonfram
meworkforalltheplayerrsintheproccesstouse.
Th
hecycleensu
uresthatpoliticalpriorittiesareset.
Th
he budget cycle is linked to th
he overall planning cycle
c
of th
he
de
epartment.
Th
here is a com
mmon apprroach acrosss governmen
nt to permitt compariso
on
an
ndcomparattivecosting.
Th
hereisanaggreedupon timetableforpreparationandcon
nsiderationo
of
bu
udgetswithintheorganiization.
Go
overnments provide guidance
g
to managers on budget limits an
nd
im
mportantinfo
ormationab
bouttolerabllecostlevelss.
Th
hereisacom
mmoncostin
ngmethodollogyforcom
mmoninputsssuchasstaff
salaries,equip
pment,etc.
Theeelementscan
nberolledu
upintothreeeessentialphases:
StrategicPlanningPhase,
CostAnalysisPhase,aand
ApprovalPhase
StrategicPlannin
ngPhase
Strateegic plans usually
u
conttain a fundaamental sett of components that describe th
he
purpo
oseoftheorganizationaanditsinten
ndeddirectio
onoveraprescribedperriod.
Public Secto
or Financial Management
M
fo
or Managers
12

Missioncomprehensivestatementexpressingthepurposeoftheorganization.
Visionstatementoftheendresultspursuedbytheorganization.
GuidingPrinciplesphilosophythatsteerstheorganizationindeliveringservices
andaccomplishingitsmission.
SituationAnalysisdescriptionofkeyinternalandexternaltrendsthatarelikely
tohaveanimpactontheagencyoverthetimeperiodoftheplan.
Goalsstatementsthatdescribetheagencysdestination,direction,andintent
fortheperiodoftheplan.
Objectivesinitiativesthatimplementthegoals.
PerformanceMeasuresandTargetsprecisemilestonesforeachobjectivethat
will help the organization will evaluate progress toward the objectives and the
goalsthatitsupports.
Linkage of General Goals to Annual Performance Plan description of the
relationship between annual goals in the performance plan andthe general
multiyeargoalsandobjectivesinthestrategicplan.
Resources Needed description of the human, capital, information, and other
resources and the operational processes, skills, and technology needed to
achieve the agency goals; highlighting where significant change from currently
availableresourceswillbeneeded.Note:thisisnotthebudgetforthecoming
year, but a resource discussion that will certainly affect budget decisions in
futureyears.
ProgramEvaluationsdescriptionofhowtheresultsofprogramsorpolicywill
beevaluated.
Cost-Analysis Phase
TheRoleofRevenueinCostAnalysis
Managers have to make predictions about anticipated revenues because without
understanding what resources will be available to government, it becomes extremely
difficulttodecidewhatprojectsshouldbeallocatedresources.Usinghistoricaltrenddata
is an easily available and useful tool for predicting revenue. Once a prediction is made,
attentioncouldthenbemadeaboutcostsandthespendingprioritiesofgovernment.
HowtoDetermineCosts
One way of examining costs is to divide them into two basic categories: Direct and
Indirect.
13
Directcostsarecostsincurredwithintheorganizationalunitforwhichthemanagerhas
responsibility, and costs of resources used for direct provision of goods or services or
activitiesthatrelatetothecoremissionoftheorganization.3
IndirectcostsorOverheadare:costsassignedtoanorganizationalunitfromelsewhere
intheorganizatione.g.informationtechnologysupport,andcostswithinaunitthatare
notincurredfordirectprovisionofgoodsorservices,i.e.corebusinessormissioncentral,
butarenonethelessneededtoprovidethoseservices,e.g.logisticalsupport,information
technology,physicalplant,financialservices.4
Often organizations fail to fully take into account all the costs of service delivery. The
objectiveofsoundbudgetingpractice,however,istoarriveatafullunderstandingofthe
total cost of providing the missioncritical services of the organizations. Therefore, both
indirectanddirectcostsneedtobeincludedinanybudget.
FixedandVariableCosts
Another essential tool of costing is the use of fixed and variable costs. This analysis is
important for it enables the manager to determine how costs will react when certain
variables are changed. It can establish cost sensitivity, i.e. the point at which costs can
eitherbereducedorincreasedwithchangesinactivity.Establishinganunderstandingof
cost sensitivities will enable the manager to better understand the impact of program
changes.
Fixed costs are those costs that do not change in total as the volume of service units
changesoverarelevantrangeofactivity.5Variablecostsarecoststhatvarydirectlywith
changesinthevolumeofserviceunitsoverarelevantrangeofactivity.6
Getting Approval to Spend: The Appropriation Process

Asthebudgetprocesssuchasdescribedabovebecomesmoreinstitutionalizeditengages
more players and eventually produces a formal budget submitted to the authorizing
authority. In general, this will mean that the final stage of the budgetary process will
providelegislativeapprovaloftheplannedexpenditures.Thepurposeofthisauthorityis
toobtainspecificapprovaltospendmoney.Suchauthorizationiscalledanappropriation.
Appropriations create the authorization for spending the amount in the budget. In this
waythebudgetmovesfrombeingasubmissionforfunds,thenaplan,thenabudgetto
becomingthelegalinstrumentofthegovernment,whichbothpermitstheexpenditureof
fundsandrestrictsthatflowtothelevelssubmittedforapproval.
3
Finkler, p. 97
Finkler, op.cit.
5
Finkler, p. 99
6
Finkler, op.cit. p. 99
4
14

CentralAgencyversusProgramOrganizations
Typically, during the budgetary cycle, the overall planning and legislative process is
supportedbycentralagenciessuchastheMinistryofFinance.Centralagenciesprovidea
wholeofgovernmentassessmentofthesupplyofrevenueaswellasthetolerablescope
forprogramexpansion.Theyensurethatdebtisavoidedbylookingatthebigpictureof
programspending.Centralagenciesusetheanalyticaltoolsmentionedabovetoprovidea
detailed assessment of the costs of government programs and then provide
recommendationstothelegislature.
Thereisaninherenttensionbetweenthedesiresofprogramdepartmentsofgovernment
to spend to meet all their program needs and aspirations and the desire of central
agencies to control the demands to what is both realistic within government revenue
projectionsanddesirablewithinthegovernmentsoverallpriorities.Suchtensionmeans
thatprogrammanagerswillhavetoworkeffectivelywithcentralagenciesiftheyareto
besuccessfuldefendersoftheirprogramfundsorproponentsofnewfunding.
TheNewVersustheOld
Perhaps one of the greatest sources of tension within budgetary systems and the
budgetary approval process is the desire by governments to extract funds from one
spendingcentreandmoveittoanother.Whilethisgoesbymanynames,itisgenerally
knownasreallocationofexistingfunds.Thisis oftenamatteroffundingnewprograms
withexistingfunds.
Governments will be continually looking for ways to improve efficiency of current

operationstoreducecosts.Theywillalsobelookingforprogramsthatnolongerservean
importantpublicpurpose.
ComplexityversusClarity
Budgetsaremadeupofastreamofdecisions,somewhatinvolvespendingandsomethat
involvelimitingspending.Veryfewdecisionsarealikeandavarietyofpolitical,socialand
economicfactorscomeintoplayintheircreation.Formanypublicsectororganizations,in
order to achieve the objective of public involvement and transparency, the budget
process can be a long one, involving many different forums, in order to arrive ata final
product.
OnBudgetVersusOffBudget
15
A challenge for many countries is getting a true picture of government expenditures.

Oftengovernmentswillseektominimizethescopeofpublicexpendituresbytakingsome
expenditure items offbudget. This can be done for legitimate policy and accounting
reasons.Forinstance,ifapublicsectorprogramisselffunding,suchasonethatobtains
all of its revenues from service fees, it can be said to operate offbudget as it does not
take up any appropriated funds from the budget. Often such entities establish financial
reporting statements seperate from the overall government financial statements. This
servesonegoodofclarity.However,itisalsocontendedthatremovingitfromthegeneral
governmentbooksdistortsthedegreeofpublicsectorspending.Thisdebateisuniversal.
Oneelementofconcern,however,iswhenoffbudgetentitiesarecreatedtodeliberately
mask or distort either government revenues, e.g. development grants from external
sourcesorremoveeffectivelegislativeoversightofthispartofthepublicsector.
Conclusion
Theprocessofformulatingandgettingapprovalforabudget,atanylevelandinanykind
of public sector organization, is an integral part of how that organization carries out its
mission. It can be complex or simple, depending on the nature of the organization.
However,somecommonelementsforpublicsectororganizationsemerge:
Budgetsbringtogetherneedsandcapacity,oftenfromdifferentpartsof
theorganizations,whetheritistaxcapacityandprogramdemandsorclient
needsandfundraisingcapacityoftheorganization.
Budgetsdemandatechnicalcommandofthekeyelementsofneeds
measurement,effectivecostingofprogram,revenueprojections.
Budgetsinthepublicsectorarelegaldocumentsthatdefineexpenditures
authoritiesandlimitittothoselevelsonceapprovedbytheauthorizing
legislature.
Budgetmakingtakesplaceinanorganizationalculture,richinnuance,with
powerplayingasmucharoleofgoodpolicymaking.
Budgetsareinherentlytransparentinthepublicsector,bothintermsof
howtheyareformedandinhowtheyareexecuted.
Budgetsareboththeresultofplanningbasedonpastexperienceandthe
existingpolicyormissionframeworkoftheorganizationandfuture
orientations.
Budgetsinthepublicsectoraresubjecttointensescrutinynotonlyby
thosewhowillmanagethem,butalsothosewhowillbenefitfromorbe
subjecttothem.
16
Section4:Budgeting:CapitalPlanning
Key Points
Capitalassetsareexpensive,havealonglife,canlockinanorganizationinterms
ofalternativeoremergingtechnology.
Thetotalcostofacapitalassetovertimemayincludesizeableoperatingexpenses.
Itsacquisitioncandistortoperationalplanningifthisisnotadequatelyconsidered
attheplanningphase.
Capitalrequiressomespecialtreatmentbothfromthebudgetingandaccounting
perspective.
Capital Budgets
Acapitalbudgetisaplanfortheacquisitionofbuildingsandequipmentthatwillbeused
bytheorganizationinoneormoreyearsbeyondtheyearofacquisition.Adistinction
thathasalreadybeendrawnbetweenoperatingandcapitalbudgetsisthatoftime.
Operatingbudgetsareappropriatedandreporteduponforasinglefiscalyear.Generally,
theoperatingassetsareapprovedandusedupwiththeyear.Thecapitalbudget,whileit
involvesactualcashdisbursementswithinthecourseofafiscalyear,moreofteninvolves
aflowofcashoveranumberofyearstocreateanasset,whichhasalifelongerthanone
yearataminimum.
Therefore,boththeinvestmentflowandtheassetreturnextendoveraconsiderable
periodoftime.Havingcapitalprojectsdependentonyeartoyearapprovalsrestrictsthe
capacityoftheorganizationtocommittothefullcostoftheproject.Approvingthefirst
phaseofamajorconstructioninvestmentandthenreviewingitentirelywhilenot
approvingthenextphasecanleadtoaseriesofcomplicationsfromwasteofpublicfunds
toareluctancetoengageinthehighriskventureinthefirstplace.
Finally,itisoftenthecasethatcapitalprojectsinvolvelongtermdebtforthe
organization.Thechallengeoflongtermfinancinginvolvesagoodunderstandingofthe
truecostsoftheinvestment.
CharacteristicsofCapitalAssets
Fromanaccountingpointofview,somethingisacapitalassetwhenitmeetsfourcriteria:
thattheyareusedintheproductionorsupplyofgoodsand
services(productivitycriterion),
17
thattheirlifeextendsbeyondafiscalyear(longevitycriterion)
thattheyarenotintendedforresaleintheordinarycourseofoperations
that the monetized value of the asset is sufficiently high (materiality
principle)
Tools of Capital Planning and Budgeting

Effectivecapitalbudgetingbeginswithanunderstandingoftwoelements:
o CapitalImprovementsthecapitalrequirementsoftheorganization,bothnow
andinthefuture
o Maintenanceunderstandingoftherequirementstomaintainpresentcapital
assetsinausefulstate.
Governmentsstruggleonbothcounts,becauseoftheconcernforthecostsinvolvedand
becausetheyhavenotalwayssufficientlyseencapitalassetsasbeingsubjectto
deteriorationandinneedofrenewal.Aswell,intheabsenceoflifecycleanalysisandthe
applicationoftruecostingtoolssuchasTimeValueofMoneyandReturnonInvestment
Analysis,capitalexpendituresareusuallyseenasanannualexpenditureandnotan
investmentflow.
HerearesometoolsofgoodCapitalPlanning
CapitalImprovementPlans
ACapitalImprovementPlanhasamultiyearperspective.Itcanberenewedandupdated
ratherthanrecreatedeachyear.Inthisway,majorcapitalinvestmentdepreciationisnot
forgottenandmaintenanceissuesremainonthetable.Itisveryeasy,especiallyina
politicalenvironment,toforgetpipesunderthegroundortheexistingbuildingsinan
efforttofocusonmoreimmediatecrisesorthedesiretocreatenewcapitalprojects.An
exampleofacriticalareainthisregardistheneedtoupgraderoadsonaregularbasis.It
maynotbethemostpoliticallyexcitingthing,butitisnecessary.Anditcostsmoney.
SomeofthestepstobefollowinginthecreationofaCapitalImprovementPlanare:
o StrategicRelevance:Astatementthatlinkstheorganizationsgoalsandobjectives
toitspresentandfuturecapitalneeds
o AnalysisofFactorsAffectingtheOrganizationsCapitalAssetBase:Somefactors
totakeintoaccountinthatregardare:
o Demographics:Bothcurrentandfutureindicators,suchaspopulation
changesbyagecohort;impactsofbirths,deaths,immigrationand
emigration;andissuesspecifictoprogramareas.
o Programchanges:Theseincludenewinitiatives,programterminationsor
changesinprogramparameters.
18
o Technologicalchanges:Technologicalimperativesareessential
considerationstoday,especiallyasbusinessprocessesbecomemoreweb
based.
o Economicorbusinesschanges:Theseincludecurrentandprojected
financialormarkettrendsandopportunitiesandemergingtrendsinthe
waybusinessisconducted.Anexampleistheemergenceofservice
providersasalternativeservicedeliverersofpublicservices.
o Legislation:Factorstoconsiderhereincludeanynewstatutory
requirementsaffectingtheorganizationoritsserviceplan.
o Environmentalfactors:Theseincludetheimpactofanypotentialchanges
toenvironmentalstandards.
o InventoryandConditionAnalysis:Acomprehensiveassetinventory,includingan
assessmentofthephysicalcondition,functionality(i.e.abilitytosupportcurrent
programdelivery)andutilization(capacity)ofitscapitalstock.Thisshouldbe
updatedonanannualbasis.Thefollowinginformationshouldbepartofthis
analysis:
o Baselineinformation:Informationonassetssuchasland,buildings,
buildingsystemsandequipment,trackingsuchfactorsas:
i. ownershipstatus
ii. locationandzoning
iii. structuraltypes
iv. size(landareaifapplicable,squarefootage,vehiclecapacity,etc.)
v. ageandhistory(e.g.rehabilitation,repairs,maintenanceactivity,
additions,renovations)
vi. value
vii. currentuse,
viii. estimatedservicelife;and
ix. anyothersignificantissuessuchasenvironmentalliabilities.
o Physicalconditionandriskfactors:Anassessmentorratingofthephysical
conditionoftheinventory,includingmaintenancerequirements,seismic
vulnerability,asbestos,etc.
o Functionality:Anassessmentofhoweffectivelyeachassetmeetsexisting
programorserviceneeds;functionalityissometimesmeasuredasthe
differencebetweencurrentoperatingcostsandtheprojectedcostof
operatinga"stateoftheart"facility.
o PurposeorUseoftheAsset:Anassessmentofhoweachassetisbeing
used;thisissometimesmeasuredbycomparingforecastservicedemand
againstanassetscurrentcapacity
o Maintenance Needs: Maintenance requirements must be identified in capital
plans. Plans should also explain the methodologies used to develop the
19
maintenanceforecasts(e.g.measurementtools,standardsandformulasbasedon
assetvalueorsquarefootage).
o EstimatesofRequiredResources:Estimatesofcapitalassetrelatedneedsshould
beaggregatedintoidentifiablecategories.Theoverallcapitalcosts,whenoutlined
thoroughly, can be staggering for public sector organizations. Very seldom do
revenue expectations match the straightline anticipated capital costs. Usually at
thispoint,variousprioritysettingprocessescomeintoplay.
o DevelopmentofStrategiesandAlternatives:TheCapitalImprovementPlan(CIP)
itself does not provide decisions about capital expenditures. Rather, it is the
background against which the public sector organization will set priorities. One
importantserviceitcanprovideistoofferalternativestrategiesfordealingwith
capital pressures. For instance, the CIP could also identify alternative delivery
forms such as publicprivate partnerships that would, in essence, transfer the
capital costs of a new building to the private sector builder while imposing a
downstreamoperatingcostforgovernmentintheformofguaranteedrentaland
paymentofdebtcostsbacktothesupplier.
Time Value of Money

Becausecapitalprojectsarecostlyandofteninvolvemajorgovernmentinvestments,the
costoftheprojecthastobesetintothetimeframewithinwhichgovernmentswillincur
thecosts.Atthispoint,someformoftimevalueofmoneyanalysiswillhavetobeapplied
beforefinalspendingdecisionscanbemade.
Thesimplestexplanationoftimevalueofmoneyisthatadollartodayisworthmorethan
a dollar tomorrow or at any time in the future. Partially, this difference in value is
attributabletotheearningandcompoundingofinterestforadollarinvestedtoday.This
is also attributable to opportunity cost, meaning that money spent now addresses
presentneedswhilemoneydeferredmissestheopportunitytodoso.
Anotherfactorthatrelatestothetimevalueofmoneyisrisk.Riskinthisinstancerefers
to possible loss of value of the funds available through an unsuccessful investment in a
capitalproject.Thedollarinhandtodayhasnorisk.Itisfirmlywithinthecontrolofthe
organization and it can dispose of it, save it or invest it as it sees fit. The promise of a
dollartomorrowcarriessomeriskthatyouwon'tgetitoryouwon'tgetitwhenyouhave
beenpromisedyouwillgetit.
Taking all these elements into account, time value of money considerations encourage
mangers to calculate the monetized benefits of a capital investment and then discount
thosebenefitsinawaythatreflectsthedecliningvalueofadollarofbenefitoccurringin
thefutureratherthantoday.
PresentValueandFutureValue
20
Applyingtechniquesofinterestcompoundinganddiscounting,itispossibletodetermine
eitherthepresentvalue(PV)orfuturevalue(FV)ofacapitalinvestment,usingasimple
formula that applies interest and time to the amounts that are eitheravailable now for
investmentincapitalorthepresentvalueofafuturepayment.Thevariablesusedinboth
calculationsare:
PV=PresentValue
FV=FutureValue
i=InterestRatePerPeriod
n=NumberofCompoundingPeriods
Present Value is an amount today that is equivalent to a future payment, or series of
payments, that has been discounted by an appropriate interest rate. Since money has
time value,the present value of a promised future amountis worth less the longer you
have to wait to receive it. The difference between the two depends on the number of
compoundingperiodsinvolvedandtheinterest(discount)rate.
Therelationshipbetweenthepresentvalueandfuturevaluecanbeexpressedasshown:
Relationship between Future Value and Present Value

PV = FV [ 1 / (1 + i)n ]
Example: You want to buy an emergency generator for the Fire Department
that will only become useful 5 years from now for $150,000. Assuming a 6%
interest rate compounded annually, how much should you invest today to
yield $150,000 in 5 years?
FV = 150,000
i =.06
n=5
PV = 150,000 [ 1 / (1 + .06)5 ] = 150,000 (1 / 1.3382255776) = 112,088.73
21
NetPresentValue
NetPresentValue(NPV)isameanstocalculatewhetherthepublicsectororganization
will be better or worse off if it make a capital investment. It does so by calculating the
presentvalueofinflowsminusthepresentvalueofoutflows.
NPV=PVInflowsPVOutflows
Risk Assessment
Itiscriticaltounderstandandassesstheriskinvolvedineachinitiative.Risksshouldbe
identifiedattheearlieststageofplanningastheymayimpactfinancingandprocurement
options. Once risks have been identified, they must be analyzed and evaluated to
determine the likelihood, consequences and level of risk. Finally, a risk management
and/ormitigationstrategymustbeputinplace.
Risksshouldalsobereviewedandupdatedastheinitiativemovesforward.
Thetablebelowprovidesexamplesoftheriskcategoriesthatshouldbeconsideredwhen
planning and managing infrastructure expenditures. It also provides examples of how
thesetypesofrisksmaybetreatedtoreducethelikelihoodorconsequencesofpotential
losses.
ExamplesofRiskCategoriesinAssessingCapitalAssetRisks7
RiskCategory
DescriptionandTreatment
GeneralRisks
Examples include highlevel concerns related to the decision to undertake an

initiative. Risk treatment may include documenting how an initiative fits with
established strategic objectives; assessing the requirements for a new
corporate structure; enhancing the initiatives profile with the public, media
andgovernments;andworkingcollaborativelytoenhancelabourandindustrial
relations.
Examples include the likelihood that an initiative represents, or may be
affected by, a major shift in government or agency policy, or change in
legislation.
Examplesincludetheinitiativesenvironmentalimpactanditsrelationtopublic
health, safety and security issues. Risk treatment may include working with
neighbours and the community to address public concerns in the initiative
planningphase.
Examples include the complexities associated with partnerships, investments
and management. Risk treatment may include managing dependencies on
linkedfundingandcontingentinvestments;ensuringtheavailabilityofqualified
initiativemanagers;andensuringtheinitiativedevelopmentteamhasaccessto
appropriateexpertisewhenundertakinganewtypeofinitiative.
PolicyRisks
PublicInterestRisks
Managementor
OrganizationalRisks
BC Capital Asset Management Framework
22
Design/Construction,
Commissioning,
PartnershiporSupplier
Risks
PoliticalRisks
Examplesincludesponsorrisk(e.g.,thelikelihoodthataprivatepartnermaybe
unable to deliver) and general supplier/market capacity. Risk treatment may
includeensuringtheavailabilityofmaterialandequipmentsupplies;ensuring
thatexperienceddesigners,contractorsandtradespeopleareavailableinthe
required time frame; anticipating the need for community permits and
approvals;anddesigningconstructionwindowstoavoiddelaysduetoadverse
weather.
Often unspoken, but certainly real are many political risks associated with
capitalprojects.Examplesofsomeare:
short tenure of a government that may mean the project is re
evaluatedorchangedbyanewgovernment,
local opposition to a project that leads to considerable political
controversyandreversalongroundsofcommunityconcerns
failuretoadequatelyconsultortakeintoaccountvariousstakeholder
interests
SiteRisks
FinancingRisk
Cost,
Economicor
MarketRisks
Ownership
and
Operations
Risk
OtherRisks
Examplesincludetherisksassociatedwithsiteselectionandacquisition.
Risktreatmentmayincludeensuringthatthesiteisavailableatanaffordableprice;
evaluatingsitechallengessuchassoilcontaminationorpotentialflooding;andensuring
thedesiredsiteisfreeofpotentiallandclaimissues.
Examplesincludeanentitysabilitytodrawtherequiredfinancialresourcesandthe
overallfinancialviabilityoftheinitiative.Risktreatmentmayincludeensuringthat
financingisavailableattheappropriatetime;anticipatingtheimpactofinterestrate
increases;andevaluatingthecreditworthinessofpotentialpartners.
Examplesincludeallpossibleeventsthatcouldaffectcashflowduringinitiative
development.Risktreatmentmayincludeplanningforcontingenciesinthemarketsuch
asadropindemandforservices;anticipatingthepotentialforlabourormaterialcost
escalations;ensuringfundingisavailabletocoveroperations,maintenanceand
administration;andassessingthepotentialforcompetingfacilities.
Examplesincludelabour relations,maintenance,andtechnicalandassetobsolescence
risks.Risktreatmentmayincludetakingstepstokeepmaintenanceinlinewithforecast
levelsandtakingappropriatemeasurestoaddressthelikelihoodofabandonment.
Risksthatcouldbesubstantiveandrequireresolutionand/or
managementpriortocommitmenttotheexpenditure,orduringdelivery,including
uncontrollableforcemajeureriskssuchasweatherandglobaluncertainty.Risk
treatmentmayincludedevelopingcontingencyplanstoavoidorreduceconstruction
delaysduetoemergenciesordisaster;andensuringthatbusinesscontinuityplans
addressawiderangeofpotentialevents.
Conclusion
Theconceptualtoolsandplanningprocessessuggestedhereisanimportantpartof
organizationalfinancialmanagementwherevercapitalplaysanimportantroleincarrying
outthatorganizationsmission.Thinkingaboutcapitaloftenchallengesthelinemanager
toescapetheyeartoyearoperatingbudgetorientationandlookattheimplicationsof
suchelementsastheactualcostofaninvestmentincapitalforbothoperatingcostsdown
theroadandfurthercapitalinvestments.
23
Oneoftheotherveryimportantreasonstohaveaspecialawarenessofcapitalbudgets
andhowcapitalbehavesovertimeisthatofteningovernment,theissueofmaintenance
andreplacementofcapitalgoodsiseasilydeferredwhendifficultbudgetcutshavetobe
made. What this has led to in some countries is a serious underinvestment in
infrastructurethatwillnowcostmuchmore,inpresentvalueterms,toreplace.Thishas
beenthevictoryoftheshorttermoverthelongterm.Unseensewersveryseldomattract
politicalattentionuntiltheybreakdown.
24
Section 5: Cornerstone Two: Monitoring Money

Managerial Control
Key Points
Thebudgetisaplan.Onceapproved,ithastobecarriedout.Thedesiredoutcomeof
implementingthebudgetistoachievetheobjectivesoftheprogram,projectorlineof
activityinthemostefficientandeffectivemeansthatarereasonabletothesituationbut
withanequalconcernfortheproperuseofpublicfunds.Inanyenterprise,thisrequiresa
seriesofcontrols.Takentogether,theseformafullcontrolframework.Controlbegins
andendswithafocusontheendstobeachievedandhowtomonitorperformance.
Forthelinemanager,controlsestablishtheextentoftheirdiscretionandoutlinetherules
bywhichtomakedecisions.Effectivecontrolswillensurethatthereisatimely
understandingoftheperformancewithintheorganizationthatwouldpermitadjustments
inbudgets,behavior,orprogramexpectationstoaccommodateunforeseensituations
andmonitortheimpactofmanagersdecisions.
What is Management Control?
Managementcontrolsystemsconsistofallorganizationalstructures,processesand
subsystemsdesignedtoelicitbehaviorthatachievesthestrategicobjectivesofan
organizationatthehighestlevelofperformancewiththeleastamountofunintended
consequencesandrisktotheorganization.8
Management Control Framework

Acontrolframeworkisawayofdescribingthearchitectureofcontrolforthe
organization.Acontrolframeworkwithinanorganizationwillinvolvecertainkeyfeatures:
Establishingtheorganizationsgoalsandobjectives
Assigningrolesandresponsibilities.
Performancestandardswheretheycanbeestablished.
Systems Theory and Management ControlBy:Dr. Shahid Ansari:

http://faculty.darden.virginia.edu/ansaris/Systems%20Theory%20and%20MCS-TN.pdf
25
Anunderstandingoftherisksinherentintheprogramandthe
environmentalinwhichitistakingplace
Positivemitigationandmonitoringtoolstocontinuallyreassesstherisks
Aseriesofcontrolproceduresandpoliciestobothaddresstherisks
identifiedandtosatisfycertainlegislativeorpolicycreatedrequirements
foradequatecontrol
Asystemofmonitoringatboththeoperationalandfinanciallevelto
ensurethattheorganizationfullyunderstandswhatishappeningrelative
toitsgoalsandtheriskenvironment
Asystemofauditingandevaluation,bothinternalandexternal,that
providesassurance,fromanindependentperspective,thatthereisan
adequatecontrolframework,thatitisworking(andnotjustpaper)and
thattheoutcomes,bothoperationalandfinancial,areastheorganization
claims.
Risk and Risk Management

Inmanyways,actuallyexercisingcontrolmeansanticipatingandmitigatingriskswithin
theorganizationorprogram.ControlisaboutRiskManagement.Riskandrisk
managementhavebothanarrowdefinitionassociatedwithfinanciallossandalarger,
morecomprehensiveoneassociatedwithorganizationalgoalsandthethreatstoattaining
them.Inthecontextoffinancialmanagement,riskmanagementencompassesboth.
Nonetheless,riskcanbroadlybedefinedasfollows:anythreat,event,patternofpastor
anticipatedbehaviourorpredictedeventthatcoulddetertheorganizationfromachieving
itsgoals.
Inapplyingthisdefinitiontopublicsectorfinancialmanagement,thereareclearlysome
conditionsthathavetotakenintoaccount.First,thegoalsofallpublicsector
organizationsaretoperformapublicgoodinthemannerprescribedbylaworpolicyina
costeffectivemanner.Second,itispossibletoreadilyinterpretthisdefinitioninfinancial
termsinanumberofways:
Thedangerofnotmanagingentrustedfundseffectivelyorlegally,
Thedangerofinadequatefundingcombinedwithexaggeratedobjectives,
Thedangerofspendingoverbudgetwithouttakingmitigatingmeasures,
Thedangeroffraudormisuseoffunds,
Thedangerofunforeseencircumstancesthatstrainorthreatenthe
financialcapacityoftheorganization,
Thedangeroflossofconfidencefromthepublic,thelegislature,donorsor
stakeholdersinthecapacityoftheorganizationtodeliveritsservicesas
promised.
26
Riskmanagement,therefore,istheestablishmentofproceduresandmanagement
systemstoidentify,assess,validate,mitigateandmonitorriskstotheorganizationinsuch
awaytoeliminatethem,effectivelyreducetheirimpactorbepreparedtorespondto
them.
UnderstandingandDefiningtheRisks
Akeypartofriskmanagementinvolvestheneedformanagerstomakedecisionsabout
whatriskstoactonandwhichonesdonotrequireanyactionatthetimeofreview.
.
Notallrisksarethesame.Itisnecessaryfortheorganizationtodecidewhichonesare
importantanddemandingofacertainlevelofmitigationandwhichonesareeithernota
significantthreat,nottimelyoreasilymitigatediftheydooccur.
Anumberofsystemshavebeenestablishedtohelporganizationsdeterminethelevelof
riskthattheycanaccept.Suchsystemsarevaluableastheyestablishacommonlanguage
andframeworkfororganizationstoeffectivelycometoanunderstandingoftherisksthey
faceandthemeaningoftheiridentificationofthem.Ensuringthatalllevelsofthe
organizationsusesuchcommontoolsensuresthatmisunderstandingsaboutrisksandthe
controlneedsthatmayflowfromthemarereduced.
Belowisastandardgridtoenableorganizationtorankriskontwokeyaxes:impactand
likelihood.Withoutdeterminingwhatthelikelihoodandpotentialimpactofanyidentified
risk,thereisnoreasonablewaytodeterminewhattodoabouttherisk.Further,thisis
thekeywaytodifferentiaterisksanddeterminewheretoapplyscarcemanagerial
resourcesinthemitigationprocess.
POTENTIAL RISK MANAGEMENT ACTIONS
Considerable
Extensive
Must manage and

management
management
Significant
monitor risks
required
essential
Risks may be worth

Management effort Management effort
Moderate
accepting with
worthwhile
required
monitoring
Accept risks
Accept, but monitor
Manage and
Minor
risks
monitor risks
IMPACT
LOW
MEDIUM
HIGH
LIKELIHOOD
27
Control Procedures and Policies

WhoandWhentoControl
Nowthatwehaveanideaaboutwhereourobjectivesmaybecompromisedthrougha
riskidentificationprocess,weneeddecidehowtoachievethekindsofcontrolsthatare
needed.Theactofcontrollingfinancialresourcesisanactiveonethatboththemanager
oftheprogramandthefinancialexpertshavebeengagedin.Itcannotbelefttofinance
toprovideallthecontroloversight.Itistoocloselytiedtothemanagersresponsibilities
todeliverthepublicgoodforwhichheorsheisresponsible.
Thefirstcontrolquestiontoaskwhencontemplatingthemeansofcontrolis:whoto
controlandwhentodoit.
Intermsofwhotocontrol,therearetwochoices:theorganizationasawholeoran
individual.Theindividualmaybeapersonwithintheorganizationwhoismakinga
decisiontospendfundsonbehalfoftheorganization.Alternatively,theindividualmaybe
therecipientofapublicgoodorentitlement.Inmanycases,whentheorganizationisto
bethesubjectofcontrol,thecontrolswillentailinformationatanaggregatedlevelof
performance,e.g.quarterlyreportsoncontractsauthorizedandlevels.Ifitisan
individual,itmaybeattheindividualtransactionlevel.
Intermsoftimeorwhentocontrol,thealternativesaretoexercisecontroleitherbefore
oraftertheindividualororganizationhasacted.Beforethefact,orexante,controls
involvesubjectingadecisionthattheorganizationorindividualisabouttomaketosome
levelofapprovalorreviewinadvance.Asanexample,anorganizationmayrequire
approvalfromitscentralofficebeforepurchasingequipmentoverthevalueof$50,000.
Thisapprovalisaformofcontrolandrequiredbecauseofthematerialityofthepurchase.
Thisisinspiteofthefactthatpurchaseofthisitemmayhavebeenapprovedaspartofa
largerbudgetplan.
Afterthefact,orexpost,controlinvolvesareviewprocessfordecisionsandexpenditures
thathavealreadybeenmade.Insuchcircumstances,theactor,beittheindividualorthe
organization,isfullyresponsiblefortheactionthatwastaken,astheyhadtheauthority
toapproveitandactionwastakenasaresultoftheirauthorization.Forexample,a
chequemaybeissuedontheauthorityofanindividual,notsubjecttoanyotherreview,
excepttoverifythatitistheapprovedofficialwhohasthatauthority.However,some
formofcontrol,throughmonitoring,sampling,summarizedreportingorvarianceanalysis,
isputinplacetooverseethequalityofdecisionsalreadymadeeitheratanindividual,or
aggregatelevel.Thisisthemorecommonformofcontrolexercisedoverfinancial
transactionswithinorganizations.Itismoreefficientintermsofprocessingpayments,
etc.italsofocusespriorapprovalsontheriskiertransactions,therebyeffectively
budgetingseniormanagementandgovernancentime.
28
WhoistheController?
Thenextquestiontoaskiswhothecontrolleris.Thesimplefactisthat
controller/controlleerelationshipsexistatmanylevelsandoperateinmanyways.
Therefore,whileonemanagermayexercisecontroloveragroupofstaffandsetup
processesofcontrolsuchasregularperformancereviews,delegationtolimitstodefine
discretion,etc.,thatverymanagerwillalmostcertainlybesubjecttocontrolsbothfroma
superiorandalsofromoversightbodiessuchasexternalauditors.Anotherpointisthat
theyareimperfectandoftencloudedbyothermatters,betheyoperational,financialor
political.
Trust and Ethics in Control

Ifriskmanagementisthefaceofcontrolthewayinwhichcontrolisexpressedthan
trustandethicsaretheheartofcontroltheculturalrealitythateithersupportor
destroyeventhemostperfectcontrolplan.
Fundamentally,allcontrolsarebuiltaroundtwonotions:
thedegreeoftrustthecontrollerplacesintheorganizationorpersonswith
authorityandresponsibility,and
theassumptionsaboutethicalbehaviorinthecultureandlegalframework
oftheorganization.
Trust
Trustisacalculationthatismadebytheorganizationaboutitsownpeople,aboutother
organizationsandotherpeopleaswellasitsleadership.Trustisalsoanimportant
elementinbalancingthedesireforfullassurancethroughcontrol(nosurprises,noerrors)
withthecostorimprobabilityinachievingit.Intheend,morecontrolsystems,nomatter
howtechnologicallysoundordetailed,dependonthepeoplerunningthemandoperating
withinthem.Therefore,adegreeoftrustisnecessarilyextendedtooperatorsofthe
systemswiththeassumptionthattheirintentionsaresoundandthat,basedontheir
trackrecord,suchtrustisdeserved.
Ethics
Notallcontrolisaboutsystems,procedures,documentationandprocess.Infact,allof
thiscontrolcouldbehappeningand,withthewrongvaluesinplay,seriousintrusionsinto
pubictrustcouldbeaccruing.Thiscouldbeeitherthroughmisappropriationofpublic
funds,usingthemforpurposesnotintendedortheirdiversiontootherpurposesofa
personalnature.Itisaxiomaticthatthepublicsectororganizationsandthepeoplewithin
themhavetoactinanethicalmanner.
Therefore,ensuringthattheethicalframeworkoftheorganizationsanditspersonnelis
soundisyetanotherformofcontrol,onethatisessentialtothesuccessofallother
efforts.
29

Oneofthemostimportantelementsofestablishingstrongvaluesandethicsisthrough
ethicalleadershipwithintheorganization.Notethatthisisthefirstitemidentifiedbythe
OECDinitsframeworkforethicalpublicsectororganizations,aslistedbelow:
Values and Ethics Approaches
Political and senior management leadership that promotes ethical
conduct
Clear statements of values and ethics or codes of conduct
Approaches to decision making that
o require consideration of values and ethics
o align management policies to support ethical conduct
o offer recourses to report ethical concerns
Clear guidance for interaction between the public and private sectors
Assessment of and reporting on effectiveness of values and ethics
initiatives
Source: Organization for Economic Co-operation and Development (OECD),

Principles for Managing Ethics in the PublicService
TheattributesofethicalleadershipweredocumentedbytheCanadianfederal
governmentsTaskforonPublicServiceEthics9:
Createasupportiveworkenvironmentthat
o valuespeople,treatingthemwithdignity,civilityandfairness;
o emphasizesopennessandthesharingofinformation;
o promoteshonestandcollegialleadership;
o encouragesandsupportsspeakingtruthtopower;and
o supportsabalancedfamilyandworklife.
Makedecisionsthat
o servethepublicinterest;
o respectdemocraticprinciplesandtheruleoflaw;
o ensuredueprocess,impartialityandobjectivity;
o provideeffectiveservicestocitizens;and
o promotetransparency,probityandaccountability.
AStrongFoundation:ReportoftheTaskForceonPublicServiceServiceValuesandEthics,JohnC.Tait,
Q.C.,Chair,availableathttp://www.myschoolmonecole.gc.ca/Research/publications/html/p91/1_e.html
30
Someofthetoolsthatpublicorganizationscananddousetoensurethattheyhave
promotedethicalbehaviourare:
establishingcodesofconductorethicstosignaltheimportantvaluesofthe
organization
supportingsanctionsforethicalmisconduct
usingmeritprinciplesinhiringandpromotion
awidevarietyoftraininginitiativesonethicsforbothnewemployeesand
thosealreadyinposition
identificationofhighriskpositions(notpersons)whereeitherspecial
trainingonethicalchallengesorspecialsurveillanceiscalledfor
disclosureofanyconflictsofinterestandpoliciestosupportthis,noting
thatthisbecomesmoreimportantthehighertheleveloftheposition,
toolstoreportmisconductofsuperiorsandadequatesafeguardsforthose
reporting,i.e.confidentialchannelsandwhistleblowerlegislation
Ombudsmenpositions
ethicalcounselors,trainers,offices
theinvolvementofprofessionalassociations,suchasCICA,todevelop
ethicalguidelinesformembership
Clearly,controldoesnothappenwithoutadequatevaluesandethicstosupportit.
Therefore,addressingethicsaspartofanoverallcontrolstrategymakesgoodsenseandis
probablylesscostlythatmoreregulatorymeasures.
Controllership Capacity Checklist

AccordingtotheTreasuryBoardofCanadatherearesevenkeyareasofcontrollership,all
ofwhichhavebeendiscussedimplicitlyorexplicitlyabove.
ThesevenkeyareasoftheComptrollershipCapacityCheckare:
StrategicLeadership
Leadershipcommitment:Awarenessandcommitmentofdeputyheadandsenior
managementtoestablishingandimplementingamodernmanagementpractices
environment
Managerialcommitment:Awarenessofmanagersoftheirmodernmanagement
practicesresponsibilities,andcommitmenttoimplementingthem
Seniordepartmentalfunctionalauthorities:Extenttowhichseniordepartmental
functionalauthorityandsupportingorganizationareusedforobjective
commentaryandindependentadvice
Planning:Strategic,businessandoperationalplanning,andthelinkagesbetween
themandtoresourceallocation
ResourceManagement:Mechanismsforrankingprogramoptions,identifying
fundingrequirementsandallocatingresources,andbudgetingandforecasting
31
Managementofpartnerships:Partnershipsareusedextensivelybythe
organizationinsupportofservicedeliverybyleveragingthecapabilitiesofexternal
stakeholders,partners,andothergovernmentorganizations
Clientrelationshipmanagement:Commitmenttoconsciouslystrengthening
relationshipswithclientorganizations,andtointegratingandcoordinatinghow
clientservicesaredevelopedanddelivered
ClearAccountability
Clarityofresponsibilitiesandorganization:Clarityofassignmentof
responsibilitiesandaccountabilitiesthroughouttheorganization
Performanceagreementsandevaluation:Extenttowhichtheachievementof
financialandoperatingresultsisembeddedinperformanceagreements
Specialistsupport:Availabilityoftopflightcounseltohelpmanagersmake
judgmentcallsonmodernmanagementandoperationalissues
Externalreporting:ExtenttowhichParliamentary,centralagencyandkey
stakeholderinformationreportingrequirementsaremet
SharedValues&Ethics
Valuesandethicsframework:Leadershipofpoliciesandactivitiesthatvisibly
supporttheethicalstewardshipofpublicresourcesandgivepriorityto"modern
managementpractices"
MatureRiskManagement
Integratedriskmanagement:Measuresareinplacetoidentify,assess,
understand,acton,andcommunicateriskissuesinacorporateandsystematic
fashion
Integratedmanagementcontrolframework:Appropriatenessofmanagement
controlsinplace,andlinkagesbetweencontrolsthroughanintegratedcontrol
framework
IntegratedPerformanceInformation
Integrateddepartmentalperformancereporting:Keymeasuresexisttomonitor
overallorganizationwideperformanceandbestvalueresults
Operatinginformation:Measuresandsystemstomonitorservicequalityand
efficiencyofprogramdelivery
Measuringclientsatisfaction:Utilizationofclientsurveyinformationon
satisfactionlevels,andimportanceofservices
Servicestandards:Monitoringagainstclientservicestandardsandmaintaining
andupdatingstandards
Evaluativeinformation:Utilizationofnonfinancialinformationrelatedto
programeffectivenessandoutcomes
Financialinformation:Reliablefinancialinformationisavailableinatimelyand
usefulfashion
Costmanagementinformation:Mechanismsforusingactivity/product/results
basedcosts
MotivatedPeople
32
Modernmanagementpracticescompetencies:Extenttowhichmodern
managementpracticescompetenciesaredefinedandmanagershaveaccessto
training
Employeesatisfaction:Mechanismsinplacetomonitoremployeemoraleand
staffrelations
Enablingworkenvironment:Practicesforcommunication,wellness,safetyand
supportthatenablestafftoprovideclientfocuseddeliverywhilereachingtheir
fullpotential
SustainableWorkforce:Theenergiesofstaffaremanagedwiselytohelpsustain
theorganization'sviability
Valuingpeoples'contributions:Extenttowhichtheorganizationalculturefosters
staffparticipation,teambuilding,sharingofideas,risktaking,innovation,and
continuouslearning;andrewardsorprovidesincentivesforsuchbehaviour
RigorousStewardship
Businessprocessimprovement:Extenttowhichprocessesareclearlyunderstood,
areconductedinauniformfashion,andarecontinuouslyimprovedinlinewith
bestpractices
Managementtoolsandtechniques:Rangeofanalyticaltechniques(e.g.,cost
benefit,sensitivity,lifecycle,benchmarking)availabletomanagers
Knowledgemanagement:Performance/managementinformationisreadily
accessibletointernalandexternalusersviatechnology,andlessonslearntare
sharedacrosstheorganization
Accountingpractices:Recordsoffinancialtransactionsarekeptonaconsistent
andusefulbasisforpurposesofauditandreporting,andareconsistentwith
generallyacceptedaccountingpracticesandtheFinancialInformationStrategy
(FIS)10
Managementofassets:Assetsaremanagedandutilizedefficientlybasedona
lifecycleapproach,recordsofassetsaremaintained,andassetsareaccountedfor
onanaccrualbasisaccordingtoGAAP/FIS.
10
InexplainingwhattheFISis,thefederalgovernmentofCanada,statesthefollowing:FISisagovernment
wideinitiativedesignedtoenhancedecisionmakingandaccountabilityacrossgovernment,andimprove
organizationalperformancethroughthestrategicuseoffinancialandnonfinancialperformance
information.ThethreekeycomponentsofFISare:
Systemstheintroductionofnewmodernintegratedinformationsystems;
Policiestheadoptionoffullaccrualaccountingsimilartowhatispractisedinthe private sector;
Peopleaculturalchangefocussedonenhancedanalysisanduseofinformation.
Accountingisonlythestartingpoint.ThegreatergoalofFISistobringaboutalltheattendantchangesin
systems,policiesandpeople.Ultimately,FISaimsatnothinglessthanchangingthecultureofresource
managementintheGovernmentofCanada.
http://www.tbssct.gc.ca/fin/sigs/fissif/faq/faqfissif_e.asp#whatis
33
Internalaudit:Stronginternalauditprogramisinplace,andauditresultsarea
criticalinputtomanagementdecisionmaking
Externalaudit:Processforensuringadequateattentiontoresultsand
recommendationsofexternalauditsofdepartmentoperations
34
Section 6: Cash Management: In-Year Control
Key Points
Inadditionto,exanteandexpostcontroltools,therearealsotoolsofcontrolwithinthe
currentyearmanagementofresources.Thisisrealtimecontrol,whentheissuescanbe
quitevisceralforanorganization.Willtherebeenoughcashtopaythestaffattheendof
themonth?Areweareontargetforourbudgetprojections?Howdowefindresources
forthisunexpectedemergency?Wherecanwefindfundstomeetsomeshortterm
demandsthatarewellwithinourmandateandauthority,butthatwehavenotallocated
fundsfor?Whatwillwedowiththisunexpectedsurplusduetoadropinprogramlevels
thatwehadnotexpected?
Manyoftheanswerstothesequestionsarecontainedinaprocessknownascash
management.Someofthekeystogoodcashmanagementare:
effectivecashflowprojectionsandforecastinginordertoassesstheorganization
performanceagainstplanandbudget,
reportstotheappropriateauthoritiestoalerttochanges,confirmthatthebudget
willbespentaccordingtoplans,releasesurplusfundingforreallocationand
monitormanagerialperformancetomakeadjustmentsintheshortterm
governanceprocedurestoensurethetimelyreviewoffinancialandperformance
informationandtomakedecisionstoadjustprograms,reassessbudgetsorfind
alternativestrategiessuchasincreasingcashavailableorreallocatingfundsnot
needed..
Inessence,cashmanagementembracesabroadrangeofcontrolpracticesassociated
withthemonitoringoffinancialperformancewithinthecurrentfiscalyear(inyear)to
assurethatadjustmentscanbeandaremadetoaccommodatechangesinrelationtothe
planandbudget.
Objectives of Effective Cash Management, Monitoring and Control

Theobjectivesofcreatingasystemfororganizationalcashmanagementare:
Tohavefundstopaythebills,i.e.,sufficientliquidity
Tousebudgetedresourcesfortheirprogrampurposesandnotleave
neededfundsunspent
Tokeepwithintheappropriatedorauthorizedbudget
Tohavetheorganizationalandresourcecapacitytoreacttochangesin
plan
35
Toreallocateavailablefundstomeetemerging,shorttermpriorities.
Establishing a Cash Management System

Oncethereisabasicunderstandingofcashinflow,youcannowmoveontodeveloping
cashmanagementsystem.Beyondsimplyfocusingonsourcesofcashandfocusingonin
yearbudgetmanagement,acashmanagementsystemwillhavethefollowingelements:
Anappropriatedbudget
Buildinchangesandmodificationstotheapprovedbudgettocreateanadjusted
budget
Cashflowprojectionsoverthebudgetperiod:theinyearcashfloworexpenditure
plan
Asystemofmeasuringactualfinancialperformanceinrelationtotheprojected
plan
Asystemofmonitoringperformance,identificationofvariancesandreporting
resultsattheappropriatelevel
Thecapacityformanagementdiscussionandanalysisoftheresultsandvariances
Agovernancemechanismsthatwould
o reviewtheresults,
o assessvariances,
o determineadjustmentsneededand
o makedecisionsneededtoaffectthoseadjustments.
Inthecycleabove,rolesandresponsibilitieswillvarydependingontheorganization,but
anycashforecasting,monitoringandmanagementsystemwillinvolveacombinationof
interestsandtasks:
Seniormanagementmustsetbudgetsandprogramdirection,
Resourcesshouldbeallocatedasfullyaspossible,withexceptionssuchasreserves
andholdbacksagainstuncertainties,
Linemanagersmustmanagetheresourcestheyaregiventocarryoutprograms,
Financialadvisorsmustprovideinformationfordecisionmakingtobudgetsetters
aswellasadvicetolinemanagersabouttheirbudgets,
Financialadvisorsmustalsoprovideinformationandanalysistoidentifyvariances,
offercomparisonsandfurtheranalysisofbudgetperformandmake
recommendationstolinemanagersandseniormanagers,
Financialadvisorsmustpreparereportsforseniormangerstomakedecisions,
Linemanagersmustrespondtovariancesagainstplanswithexplanations,
solutionsandalternatives,and
Seniormanagersmustdeterminewhatactionstotakebasedonthesetwosetsof
inputs.
36
Fortunately,formanygovernmentorganizations,theissueofcashinflowsisnotonethat
theyhavetoaddress.Budgetsaresetinapredictablemannerandthemanagerdoesnot
havetobeconcernedaboutfindingthemoneytomeettheobligations.
Thefocusisonthecashmanagementofexpensesthataredetailedintheoperating
budgetoftheorganization.Thisusuallyencompassesfundsforstaff,benefits,supplies,
equipmentandoperationalfunds,betheyfordisbursementstoindividuals,various
elementsofthecareandsupporttoclients,orthepurchaseofservicestomeetprogram
objectives.
InyearBudgetDesignFactors
Whenpreparingforcashmanagementofexpensesandthusdesigninganinyearbudget
plan,youmusttakeintoaccountthefollowingfactors:
Thedegreeofdetailneeded:Shouldtheplanbebasedontheapprovedlineitemsin
thebudget?Shoulditbeattheresponsibilityheadlevelormoredisaggregatedor
aggregated?Forinstance,theresponsibilityheadmayhavefourunitsperforming
essentiallythesamedutiesbutindifferentlocationsandwithsomewhatdifferent
staffingpatterns.Theresponsibilityheadmaywanttoprojectexpenditurepatternson
aunitbyunitbasistopermithertobettermonitorandmanageeachunits
managementofitsresources.She,inturn,mayonlybeaskedtoprepareaplanforall
herunit.
Theperiodfrequency:Istheplantobebuiltonamonthlyorquarterlybasis?Inhigh
riskareas,thereportingmayneedtobeevenmorefrequent.Heretheissuehastobe
materialityjusthowimportantisittoknowthepatternofexpendituresatthislevel
oftimedetail?
Theroleofbudgetcapsorconditions:Onechallengeforbudgetmanagersisthatthe
seniorlineorstaffmanagersatthecorporatelevelmayinterveneintheapproved
budgetstolimitthemanagersdiscretionortosetanexpendituretargetbelowwhat
thebudgetpermits.Perhapsthelessonthatismostimportantincreatingbudget
plansisthatformallyapprovedbudgetsarealwayspotentiallysubjecttomodification
andmanagementbyhigherauthoritieswithintheorganization.
Reservesorholdbacks:Doestheorganizationdistributethefullbudgettothe
responsibilitycentremanagersorissomeheldinreservetobedistributedlateronin
theyearbasedonneedandmerit?Thisisacomplexcashmanagementquestion.
Organizationsfollowmanydifferentrouteswithaneyetoenforcegoodmanagement
andtoalsohaveflexibilitytorespondtoemergingissuesatthecorporatelevel.Such
issuesinthepublicsectorareoftenpoliticalandshortterminnature.Othersare
catastrophiceventsdemandingmassiveandtimelyresourceresponses.
EstimatingWorkFlows
Managerswhoareaskedtosubmitbudgetforecastsarereallyestimatingtheworkflowin
theorganizationthattheycanachievewiththefundstheyhave.Theyareassessingthe
37
environment,measuringrisksandsettinginplacetheirbestpredictionsofhowresources
willbespent.
UseofHistoricalData
Itisoftenarguedthatoperationalmanagersinthepublicsectorfaceanumberof
demandsthattheycannotpredict.Whilethisistrue,theexerciseofbudgetforecastingis
nottodealwithexceptions,butratherwithrules.Rulesincludethoseimposedbythe
organizationforhowthemanagerwillmanagefundsinthecomingyear,butalsotherule
ofhistorywhichisthat,allotherthingsbeingequal,organizationswillrepeattheir
behaviorunlesstheymakespecificmovestochangeit.Therefore,thebestpredictorof
howfundswillbespentinthefutureishowtheywerespentinthepast.Historicaldata
withintheorganizationshouldbeaguideforforecastingfuturebehavior.
Monitoring Financial Performance and Variance Analysis

Thereasonforallthisdetailedplanningandprojectingissotheorganizationisableto
havethecapacitytorespondtochangesinitsenvironment,dealwithunexpected
outcomesandmaximizetheuseofthelimitedresourcesatitsdisposal.Todoso,itmust
haveinformationaboutwhatisgoingon,howitisperformingrelativetoitsexpectations
andwhereithastofocusitslimitedcorrectivecapacityshouldthesituationinonearea
reachacriticalstagewherechangesarerequired.
Theorganizationthereforemustestablishandusereportingsystemsthatprovide
informationfordecisionmakingaboutcashmanagement.Usually,thiswillbecoordinated
bythecentralfinancialgroup,alongwithwhateverstaffsupportunitshaveastrong
interestinarrivingatdecisionsaboutresources.
Thequestionsthatthereportsmustanswerare:
Arewegoingtobewithinourbudgetallotments?
Areweoperatingaccordingtoourbudgetplan?
Howdoesourperformancecomparewithrelevanthistoricaldata?
Doesthisperformancemeanthatmorefundsmaybenecessaryorthatsome
fundsmaybecomesurplusinthisareaandavailableforreallocation?
Whatarethevariancesandwhyhavetheyoccurred?
Whatistheresponsibilitycentremanagergoingtodoaboutthenegative
variances?
Arepositivevarianceswithinaretentionrangeforthelocalmanagerorarethey
availableforotherneedsoutsidetheunitbutwithintheorganization?
Dowehavetheneedsandauthoritiestoreallocatethesefunds?
Whatdoesthisinformationtellusabouttheperformanceofthemanagerinthis
unit?
Whatdoesthisinformationtellusaboutthelongtermfunding?
38
SettingupaMonitoringTimetable
Allorganizationsreceiveregularfinancialreports.Mostorganizationswillwantto
establishapatternofreviewthatmakesitpossibletogatherperformanceandfinancial
dataonaregularbasiswithsomecertaintyandinastandardformat.Developingtheright
formattakessometimeandexperimentationfororganizations.Generally,aquarterly
reviewisenoughtopermittheorganizationtoidentifyareasofbothcostoverrunsand
potentialsurpluses.
Governance
Thecycleofcashmanagementreportingshouldcoincidewithhowtheorganization
governsitself.Therefore,iftimelyfinancialperformanceinformationisprovidedtosenior
management,theyshouldbeinapositiontodosomethingaboutitinatimelyanduseful
manager.Receivingquarterlyreportsbutnothavingthemanalyzedandconsideredfor
decisionmakingwillpossiblymeetsomebureaucraticneedbutproducefewresults.
Therefore,reportsshouldbepreparedforseniormanagementsothattheyareina
positiontoaskandgetanswerstothetypesofquestionsthatarelistedabove.
PerformanceReports
Thenatureofthefinancialperformancereportingwillvaryfromorganizationto
organization.Insomecases,theinformationwillsimplybethecomparisonofbudgetplan
toactualperformancedoneonaquarterlybasis.Inothers,moredetailedoperational
informationwillbeprovided.ThefollowingexampleoftheEastbrookCorrectionalFacility
looksindetailattwoparticularlineitems:staffcostsandovertimeforthisfederal
correctionalfacility.
BudgetFigures
EastbrookCorrectionalFacility,Eastbrook,NovaScotia:
QuarterlyFinancialReport,December,2007
StaffingandOvertime,CustodialStaffOnly
TotalStaff(Custodial)
225
AverageSalary
61,000K
TotalBudgetCost
13.725K
AdjustedSalaryBudget(OperatingTarget
12.900K
11
=211.5FTEs )
TotalOvertimeHoursBudgeted
54,900
TotalBudget(FullAllocation)
2.745K
AverageCostperOvertimeHour
50
11
FTE = Full Time Equivalent
39
Belowweseeareportonperformanceagainstthefiguresinthebudgetplan.Thisisa
formofreportthatdeterminesifthereisavarianceagainstplanbutprovideslittle
explanationwithrespecttoitssources.
Staffing:PlanversusActual
STAFFING: BUDGET VERSUS ACTUAL

250
240
230
220
PLAN
210
ACTUAL
200
190
180
JUNE
OCT
DEC
MARCH
YEAR
END
VarianceReports
Wheninformationissubmittedintheformatabove,itbegsmanyquestions.Normally,
theorganizationwillidentifythatthereisadifferencebetweentheplannedandactual
budgets.Thisisthevariancereport:areportthatspecificallyidentifieddifferencesin
financialandoperationalbehaviourfromwhatwasexpectedbytheorganization.Itis
importanttodeterminethematerialityorimportanceofthevariance.Bythiswemean
thatthedifferencesaresuchthatsomeformofreactionwillbeneeded.
ForecastedversusActualReport
Theprincipalissueforthesereportsisthatonlymaterialandsubstantialvariancesare
reportedandsubmittedforaction,eitherbytheresponsiblemanagerorbysuperior
levelsoftheorganization.
AnalysisofKeyVariancesReport
Duetotheneedforcontextualinformation,forecastsofplansversusactualmustbe
accompaniedbyananalysisofwhydifferencesorvariancesoccurorareanticipated.
Fromthefinancialside,anumberofanalyticaltoolsareusefultosetthevariancein
context:
Historicalcomparisons
Thecostofthevariancetodate,i.e.howmuchoftheactualbudgethas
beenspent
40
Theprojectedvarianceshouldnothingchange,i.e.thestraightline
projection
Thevarianceincomparisontosimilarunitsinthesystem
Themanagermustalsoanalyze:
Whatcausedthegapbetweenexpectationsandresults?
Workloaddeterminantsthatchangedinactualperformance
Inefficienciesthatremain
Limitationsofthebudgetitself
Actionsthatcouldbetakentocorrectthesituation
Whatdoesthetrendlooklike:isitintherightdirection?
Isthisisolatedtothisunitorageneralphenomenon?
Didwesetrealistictargets?
Canwefundtheshortfallthatweseeemerging?
HistoricalInformation
ReferencehasalreadybeenmadeinthisChaptertotheutilityofhistoricalcomparisonsin
termsoflookingatpredictionsaboutfuturespendingandinexaminingvariances.
IntheinformationprovidedontheCorrectionalFacility,nosuchdatawasoffered.Only
informationforthecurrentyearispresented.However,itcanbereadilymadeavailablein
anumberofways.Onemeansistolookatannualstaffinglevelsonayearlyaveragebasis.
Thefigurebelowprovidessuchinformation.Oneinterestingfactthatemergesfrom
havingthisinformationandcombiningitwiththeperformanceinoneyearisthat,even
thoughweknowtheactualstafflevelsarehigherthanplannedthisyear,theyareactually
thelowesttheyhavebeenforseveralyears.
HistoricalStaffingPatterns:CustodialOnly:YearAverage
HISTORICAL STAFF LEVELS

255
250
245
240
235
230
225
220
2003-04
2004-05
2005-06
2006-07(3RD
QRT)
41
Therelevanceofthisinformationisthatthereductionsinsalarycoststhatsenior
managementwantsis,generally,ontrack.
Reallocation and Readjustment

Thefinalphaseofthecashmanagementcycleinvolvesmakingadjustmentstothe
availablecashorfundsforthemanagersusebasedonthevariancereportingand
analysis.Thisisanorganizationalgovernancefunctionthatmakestheprocesstrulya
financialmanagementexerciseandnotsimplyamatterofprovidingfinancialreportsthat
donotgetused.Itmustalsoengageallmanagersandnotsimplyfinancialexperts
becauseallocationdecisionsalterprogrammaticoutcomes.
TheAuthoritytoReallocate
Ingeneral,publicsectorbudgetsareapprovedatagenerallevelbytheauthorized
legislatureorBoard,whichpermitsafairamountofinternalreallocationwithinthe
budget.Forexample,generaladministrativefundsarenotbrokenintooperatingunitsby
thelegislature.Theyaredistributedbythedepartmentalseniormanagementand,as
such,theycanbereallocated.However,certainbarrierstoreallocationmayexistandmay
createasituationwheretheorganizationhasfundstomeetneedsbutcannotusethem.
Someexamplesofsuchrulesare:
Fundsspecificallyvotedforasingleprogram
Rulescreatedbycentralagenciesthatforbidthereallocationofcertain
funds,e.g.themovementofcapitalfundstooperatingorthetransferof
suppliesorequipmentfundstosalarydollars
Specificministerialorpoliticalcommitmentthatfundsdesignatedfora
specificprogramwillonlyusedinthatprogram
Restrictedfundscreatedbyspecialpurposeendowmentsorwithrulesthat
thefundscannotbemovedfromonefundtoanother.
Theseniormanagementoftheorganizationhastoknownotonlytheformalrules
governingthereallocationoffunds,butalsothedynamicsofreallocation.Thisrequires
somejudgmentaboutwhatthereactionwillbeofspecificstakeholdergroupstothe
redirectionoffundsthatweredesignatedtoanareaofinteresttothem.
FreeingUptheFunds
Committingthefundsmeansthatthemanager,inacashenvironment,willindicatethat
thefundsunderhisorherresponsibilitywillbespent.Thenatureandfirmnessofthese
commitmentsissomethingthatthefinancialadvisorswithintheorganizationneedto
spendtimeconsidering.Acommitmentthatinvolvesanapprovedcontractiscertainly
firmerandlesschangeablethanacommitmentthanisearmarkingmoneytobespent
laterintheyear.
42
Seniormanagement,seekingtoresolveaseriesoffinancialchallenges,mayaskmanagers
toreviewtheircommitmentstoseewhatfundscanbefreedup.Inparallel,theymayask
thefinancialadvisorstodothesame,tocreateachallengefunction.
Aswellaslookingatindividualmanagersbudgetswithintheorganizationforreallocation,
thereisthepossibilityofusingsuchtoolsasreserveswithcontrolsonthereleaseoffunds
andcorporateholdbacksthatholdacertainpercentageofthefundsuntilneediswell
establishedintheyear.Thesearegenerallycreatedtogiveseniormanagementsome
flexibility.Thequestionofwhentofreethemupisoneoftimingandcompetingdemands.
Oneoftheproblemsinusingtheseuptooearlyreducesflexibilitylaterintheyear.
Conclusion
Thedegreeofriskandneedwillprobablydictatethekindofcashandbudgetary
monitoringthatoccursthroughouttheyear.Inaddition,thedegreeofinterestbysenior
managementinfinancialissueswillalsobeanindicatoroftheamountoftimethatthey
wanttospendonit.However,effectivepublicmanagementmeansbeingincreasingly
awareoftherelationshipbetweenresourcesandtheiruse.Settinguponeelementofa
financialmanagementsystem,usingthetransactional,lowermanagementsidewithout
theothertheoversightandgovernancesendssignalswithintheorganizationthatthe
effectiveuseofresourcesisnotthatimportant.
Inmakingacashmanagementsystemeffective,itmustbeseentohavetheattentionand
supportofseniormanagers.Whilethedangeralwaysexiststhatsuchprocesseswilldrag
seniormanagersintotoomanydetailsofoperations,theymusthaveinformationatthe
rightlevelthatisusefultotheminmakingdecisionsaboutthecashsituationofthepublic
organizations.
43
Section 7: Cornerstone Three: Reporting On How Money

Is Spent Accounting
Key Points
Inorderforfinancialmanagementtooccurandinorderforpublictrusttobemaintained,
youneedtomakedecisionsbasedongoodandaccessiblefinancialinformation.Toget
goodandaccessiblefinancialinformationyouneedaccounting.
Publicsectoraccountingisanactivitywithfourkeycharacteristics:
Itreliesonasetofprinciplesthatguidethecollectionandreportingof
financialinformation.
Producestangibleoutputscalledfinancialstatementswhichreduceall
transactionsintomonetizedtermsandinsodoingtrytocommunicate
trendsinagovernmentsfinancialperformance.
Itisnotanendinitself.Itisaretrospectivetoolformanagerstocontrol
theinternalactivitiesoftheorganizationbyallowinguserstodetermine
performanceagainstplans.
Isofinteresttoeveryone(bureaucrats,politicians,andcitizens)becauseit
tellsthestoryofhowpublicmoneyeveryonesmoneyisbeingspent.
Inthissection,wewilltrytoexplicitlyfocusonthefirsttwoofthesecharacteristics
principlesandoutputs.
Accounting Principles
AsetofbasicprinciplesexistreferredtoasGenerallyAcceptedAccountingPrinciples
(GAAP)guidehowfinancialinformationwillbecreated,reported,audited,andgenerally
understood.Aroundtheworld,anumberofboardsororganizationsareinvolvedin
settingaccountingstandardsandindefiningexactlywhatGAAPmeansandhowitapplies
inavarietyofcircumstances.
InCanada,forexample,thestandardsettingbodyforalllevelsofgovernmentisthe
PublicSectorAccountingBoard(PSAB),whichispartoftheCanadianInstituteof
CharteredAccountants(CICA).Inordertobecredibleandunderstandabletothepublic,
financialstatementfromthegovernmentmustcomplywiththestandardsofPSAB.Here
arenineoftheGAAPPrinciplesinCanada:
1.TheEntityPrinciple
Increatingfinancialreports,thefirsttaskistodefinetheunit,orentity,thatisbeing
reportedonandincludeanythingthatisrelatedtothatentity.Forexample,inreviewing
44
thefinancialstatementsfortheCityofOttawa,wemustbeabletoassumethatthe
informationwearelookingatdealsexclusivelyandcompletelywiththeentityweknowas
theCityofOttawa.Therefore,anemployeeoftheCitysgovernmentcannotbuysome
buildingmaterialforhisownuseandrecordthatmaterialaspartoftheCitysequipment
inventory.
Definingtheentitypermitstheorganizationtocreateabudgetforit,measureand
monitoritsuseandreportretrospectivelywithconfidencethatitisprovidingfull
informationonthebehaviorofthebudget,itsmanagersandtheobjectivesforwhichit
wassetinplace.
2.MoneyasaMeasure/theCostPrinciple
Allfinancialinformationmustberecordedintermsofthemoneycollectedorexpended.
Accountingrecognizesonlythoseactivitiesthatcanbeexpressedinmonetaryterms.The
advantageofthisprincipleisthatitisabletopulltogetherseeminglydissimilar
information,e.g.staff,suppliesandrentals,andthenexpressitinasinglelanguagethat
ofmoney.
Themonetizationorcostprinciplepermitsanorganizationtodevelopanunderstanding
ofthevalueofitsassets,usingthecommonlanguageofcost.Thisprincipleisused
whetherornotactualmoneychangedhandsinatransaction.Forinstance,ifa
governmentreceivedgiftsinkindsuchasmedicalequipment,forthepurposesofits
financialaccounting,itwillplaceamonetaryvalueonthosegoods.
Themostcommonlyusedtoolinplacingamonetizedvalueonanassetisthehistoriccost,
shouldthatinformationexist.
3.TheGoingConcernPrinciple
Thisprincipleassumesthatanorganizationwillcontinuetooperatefortheforeseeable
future.Assetsarethentreatedaccordingtowhatisexpectedtohappenoverthenormal
courseofoperations.Theywillbeexpectedtodepreciateinvalueorbeamortized
accordingtoreasonableexpectationsabouthowtheywilldecreaseinvalue,e.g.20%of
historicalvalueeachyearfor5years.
4.TheConservatismandCostConcept
Thisprinciplerequiresthataccountantsvalueassetsattheloweroftheirhistoricalcostor
marketvalue.GAAPholdsthattheaccountant,andbyextension,theorganization,will
accepttheleastoptimisticfinancialposition.Thishasbeendescribedasaprinciplein
whichaccountantsrecognizenogainsuntiltheyhappenbutrecordallpossiblelosses
evenbeforetheytakeplace.Hence,whenindoubt,itisbettertooverstateexpenseand
understaterevenue.
45
5.TheMatchingPrinciple
Thematchingprinciplestatesthatallexpensesmustberecordedinthesameaccounting
periodastherevenuethattheyhelpedtogenerate.Whenexpensesarematchedwiththe
revenuetheyhelpedtoproduce,externalandinternalusersoffinancialstatementscan
makebetterjudgmentsaboutthefinancialpositionandoperatingperformanceofthe
organization.
6.TheConsistencyPrinciple
Thisprincipleholdsthattheorganization,onceithasadoptedasetofaccountingand
financialreportingstandards,willcontinuetousethemtopermitconsistentcomparisons
betweentimeperiods.Organizationshaveoptionswithrespecttohowtheyvalueassets
andreportexpenses.Oncetheyhavedecidedhowtodothis,theyshouldcontinuetodo
so.Whentheychangethem,theyhavetoprovidewhatisacalledacrosswalktoexplain
wherechangeshavebeenmade.
7.TheMaterialityPrinciple
Inthecontextoffinancialmanagement,whenarevenuesourceorexpenditureissaidto
bematerial,thatmeansitisanamountsubstantialenoughthatitisadeterminingfactor
infinancialdecisionmaking.Accountingstandardsapplyonlytomaterialitems.Insome
cases,itmaybeappropriatefortheorganizationtotakeasimplermorepractical
approach,ratherthanspendtimeandeffortapplyingtheaccountingstandardsto
immaterialamounts.Forexample,theorganizationmayestablishadollarthresholdfor
capitalizingcapitalassets.Capitalexpendituresbelowthisthresholdwouldbeexpensed
insteadofcapitalizedonthegroundsthattheyarenotmaterial,evenintotal.
Materialityisalsolinkedtothefinancialrisksthattheorganizationseesasimportant.For
instance,manygovernmentorganizationswillaskfordetailedinformationandreporting
oncontractswithprivateproviders,usuallysettingathresholdbelowwhichthesereports
arenotneeded.Thisthreshold,e.g.$10,000,isseenasariskfactorabovewhichmore
informationandcontrolisneeded.Thisisaformofmateriality.
8.TheDualityPrinciple
Theconceptholdsthefollowingequationaskey:assetsequalliabilitiesplusequity.It
matchesassetswithliabilitiesandfunds,providingthesystemwithinternalchecksby
relatingeachinflowtoanoutflowintheorganization.
Thisprincipalexpressesitselfinthepracticeofdoubleentryaccounting.Indoubleentry
accounting,everytransactionhasatleasttwobalancingjournalentriesofdebitsand
credits,wheredebitsmustalwaysequalcredits.Doubleentryaccountingkeeps"the
accountingequation"ineffectandisthebasisforallaccountingsystems.Every
transactionaffectsatleasttwoaccounts,sincetherehastobeatleastonedebitandone
creditforeachtransaction.Entriesthatarenotmadetoabalancesheetaccountare
madetoanincomeorexpenseaccount.
46
9.TheAccrualPrinciple
Theaccrualprincipledemandsthat:
Revenuerecognitiontakesplacewhengoodsandservicesareprovidedevenif
paymenthasnotoccurred
Expensesarerecordedonconsumptionoftheassets
Accrualisseenasprovidingamuchmorecompletepictureofthefinancialconditionofan
organization.
The Quality of Information

Forgoodreason,withinmostgovernmentsthereisacontinuingpreoccupationnotonly
withconformitytostandards,buttothequalityofinformation.
Evenifallprinciplesarefollowed,faultyandinaccuratefinancialperformancedatacan
greatlydistortinternalmanagementcontrol.Ontheexternalsideitcanmisleadkey
stakeholderswithconstitutionalrightstobeaccuratelyinformed.Ineachcase,the
credibilityoftheaccountingsystemandtheorganizationitselfcomesintoquestion.
TheCICAPublicSectorAccountingHandbookmakesrecommendationsforassuringthe
reliabilityoffinancialreporting.TheHandbooksuggeststhefollowingqualitiesshould
belookedforinfinancialinformation:12
Representationalfaithfulness:Transactionsandeventsaffectingtheentity
arepresentedinfinancialstatementsinamannerthatisinagreementwith
theactualunderlyingtransactionandevents.
Completeness:Noneofthedatanecessarytoachieverepresentational
faithfulnessismissing.
Neutrality:Informationisfreefrombiasthatwouldleaduserstowards
makingdecisionthatinfluencedbythewaytheinformationismeasuredor
presented.
Verifiability:Knowledgeableandindependentobserverswoulddiscernthat
theinformationisinagreementwiththeactualunderlyingtransactionor
eventwithareasonabledegreeofprecision.
12
CICA Handbook, Update 18.
47
The Outputs of Accounting

Governmentsusetheaboveprinciplesasboundariesorsignpostsintheirattemptsto
produceaseriesofdocumentsthatpaintapictureoffinancialactivityingovernment.
ThesedocumentswillconformtoanapprovedChartofAccountswhichisadocument
thatdefinesthestructureofthefinancialrecordingandreportingsystemofthe
organization.Thesereportswillconsistof:aBalanceSheet,anIncomeStatement,anda
CashflowStatement.
TheAccountingCycle
TheBalanceSheetwillshowthestateofthegovernmentsassetsandliabilities.The
IncomeStatementwillshowhowmuchandwherepublicmoneywasspent.Andthe
CashflowStatementwillshowtheamountofcashgoinginandtheamountofcash
goingoutduringaparticulartimeperiod.
These documents are prepared according to the Accounting Cyclewhich can be

thoughtofasasetoffinancialstepsthatagovernmentisexpectedtocarryoutduring
theyear.Someofthesestepsaretakeneveryday.Otherbiggerstepsaretakenonlyat
the end of the year. The end result of all of these steps is that the organization then
hasin addition to its principles a procedure for analyzing, recording, classifying,
summarizing, and reporting its financial transactions. This process is represented
graphicallybelow.
48
DoubleEntryBookkeepingandtheFundamentalAccountingEquation
TheAccountingCycleandthecreationoffinancialreportsarebuiltuponsomevery
simpleconcepts:
doubleentrybookkeepingand
theFundamentalAccountingEquation.
Fromthere,arangeofreportscanbecreatedtomeettheorganizationsneeds.
Doublyentrybookkeepingisbasedontherecognitionthatallfinancialtransactions
involveanexchangebetweentwoaccounts.Therefore,inadoubleentrysystemeach
transactionisrecordedintwoaccounts.Additionally,eachaccounthastwocolumns.
Morespecifically,whentwoentriesaremadeforeachtransaction,oneentryismadein
thedebitcolumnofoneaccount,andtheotherentryismadeinthecreditcolumnof
anotheraccount.ThetwoentrieskeeptheFundamentalAccountingEquationinbalance
sothat:
Assets=Liabilities+Equity
Thefundamentalaccountingequationestablishestherulethat:foreveryactionthereis
anoppositeandequalreaction.Inmoreconcreteterms,foreveryincreaseinthevalue
ofonecomponent,thereisadecreaseinanother.
DebitsandCredits
Itisimportanttounderstandthatinaccountingterms,debitmeanstoorleftsideand
creditmeansfromorrightside.Anyentrytotheleftsideofanaccountisadebitand
anyentrytorightsideisacredit.Debitsincreaseassetsordecreaseliabilitiesorowners
equity.Creditsincreaseliabilitiesordecreaseassets.Thefollowingexampleand
doubleentryjournalrecordwillillustratethis.
ExamplesofDebitsandCreditsTransactions
Increase/Decrease
Columns
Debit/Credit
Definition
1.Acompanymows
ayardandreceives
paymentof$50.
2.Thesame
companybuys$100
worthofoffices
suppliesandstores
Assets=
Increase
Decrease
Liabilities+
Decrease
Increase
Equity
Decrease
Increase
Debit
Credit
Debit
Debit
Credit
Credit
50(cash)
100
(supplies)
50
100
(accounts
payable)
49
them.Theoffice
supplystoresgive
themaninvoice
thatallowsthemto
payforthemin15
days.
3.Thecompany
placesanadinthe
localnewspaper
andreceivesthe
invoiceandpays
thebillof$25.
4.Thecompany
buysfivemowers
for$10,000and
financesthemwith
abankloan
6.Thecompany
receivesacheque
for$75owedfrom
acustomer.
25(Cash)
10,000
(equipment)
75(cash)
25
10,000
(loan
payment)
75
(accounts
receivable)
Wherearetheseactivitiesactuallyrecorded?
The General Journal is a chronological listing of all financial events that affect the
organization.TheGeneralLedgerisasummaryofthisinformationorganizedaccording
tothetypesofaccountsusedintheorganizationsfinancialreports.
Theprimaryruleforjournalentries,theindividualtransactionsthatmakeupageneral
journal,isthattheymustfullyrespecttheFundamentalAccountingEquation,meaning
therecordingofthetransactionmustreflectbothitspositiveandnegativeelementsto
permitittodoso,asdiscussedabove.
KeyDefinitionsofTermsUsedInFinancialStatements
Assets are resources owned, or in some cases, controlled, by an individual or

organization as a result of transaction or events from which future economic benefits
areexpectedtoflowtothatindividualororganizations.Theyrepresenttheresourcesof
theorganizationasmeasuredinmonetaryterms.
Currentassetsarethoseassetsthatcanbereasonablyexpectedtobeconsumedwithin
the fiscal year of the organization in order to meet its needs. Therefore, they are
availableforuseandconsideredpartoftheresourcesneededtocarryouttheactivities
oftheorganizationwithinagivenperiod.
50
Cashismoneyinanyform,eitherheldonhandoronheldinfinancialinstitutionsthatis
readyfordisbursementatanytime.
Accounts receivable is money owed to the organization or individual in exchange for

goods and services it has provided or for obligations such as taxes, fines and duties.
Receivablescantakemanyformsandoftenreportedinwaysthatreflectthoseforms.
Forinstance,amunicipalitymaymailouttaxformsthat,takentogether,haveavalueof
$3,780,000.Thatfigurecouldbereportedbythecityasanaccountsreceivable,or,to
providegreaterclarity,asataxreceivablewhichisanotherformofthesamething.
Inventories are materials and supplies held for use in providing services or making a
product.Inventorieshaveatleasttwodifferentmeanings:
Supplies not for sale but for use in the delivery of goods and services, e.g.
kitchenutensilsforalongtermcarehomekitchenformealpreparation;
A detailed list showing quantities, descriptions and values of owned property,
e.g. desks, electronic equipment and other items typically found in the fixed
assetgroupneededtocarryouttheoperationsoftheorganization.
Issuesofinventorymanagementcanbeimportanttomanypublicsectororganizations.
Someofthese,especiallysurroundingtheirvaluation,willbedealtwithlaterinthistext.
Some organizations have very large inventories, often with highly cost sensitive items
thatareofhighvalue.
Prepaid expenses include assets that have been paid for and have not yet been used
butthatwillbeusedwithinthefiscalyear.Theseincludeitemssuchasfireinsurance
premiumspaidinfullatthebeginningofayearbutcoveringthewholeyearandrent
paidinadvanceofuse.
Marketable securities are, after cash, the most liquid of the assets that appear on a
balancesheet.Marketablesecuritiesareanyformofshortterminvestment,e.g.stocks,
bonds,readilyconvertiblemutualfunds,investmentsortreasurycertificatesthatcanbe
convertedtocash.
Fixedassetsarethoseassetsthatwillnotbeuseduporconvertedtocashwithinafiscal
year; referred to as longterm assets. These assets include categories such as land,
buildingsandequipment.Inassigningvaluetofixedassets,itisvaluabletogobackto
theGAAPprincipleoncostconservatism.Hence,allaccountingbeginswiththecostof
the asset not its value at the present time. For example, the purchase of land is
recordedatcost.Themarketvalueofthelandmayfluctuateovertheyears.However,
from an accounting perspective this asset is fixed. Therefore, the organization will list
thecostofthelandatthetimeofpurchase.
Theprincipleofdepreciationisthatallequipmentandplantareusedupoveraperiod
of time defined by the owners and that, at the end, replacement or refurbishment of
51
some kind would be necessary. The accrual system plays an important role in
recognizingdepreciation.Bothplantandequipmentareusedupovertheirlives,notall
atonce.Therefore,thevalueoftheassetatagiventimefromafinancialreportingpoint
ofviewistheoriginalcostminusthedepreciationratethatisappliedtotheparticular
item. Depreciation therefore will equal the annual use of the item in a monetized
fashion.Eachyearthisisrecognizedinthebalancesheetandotherreportsdealingwith
equipment.
Depreciationplaysasecondroledistributingvalueoftheassettotheyearsitisused,
notsimplyupfrontwhenthepurchaseismade.Forexample,adepartmentbuysa
vehicleatacostof$35,000toaddtoanexistingfleet.Inlistingthisexpenseinits
journal,thefullamountof$35,000willbereportedasreductionincash.$35,000willbe
addedtothefixedassets.
However,thedepartmentwillalsomakeadecisionabouttheusablelifeofthevehicle,
assumingappropriatemaintenanceisfactoredin.Letussaythatthisis5years.The
departmentcanalsoassume,basedeitheronexperienceoronanaccounting
conventiondevelopedwithintheorganizationthat,attheendofitslife,$5000willbe
recoupedthroughthesaleoftheusedvehicle.Therefore,toattributefullvaluefrom
theasset,$30,000willbedistributedoverthelifeofthevehicle.Thistranslatedintothe
followingdepreciationrateandvalueassignedattheendofeachyeartotheasset.
AnExampleofDepreciation
Year
1
2
3
4
5
Amountof
6,000
6,000
6,000
6,000
6,000
Depreciation
NetValue
29,000
23,000
17,000
11,000
5,000
reportedin
BalanceSheet
Liabilitiesarelegalfinancialobligationstheorganizationhastooutsiders.
Currentliabilitiesarethoseobligationsthatwillcomedueinarelativelyshortperiodof
time,usuallywithinthefiscalyearforwhichthereportsarebeingprepared.
AccountsPayablerepresenttheamountsthattheorganizationowesitssuppliers,
creditors,serviceagents,etc.Thiscategoryishighlycurrent,usuallyrequiringpayment
withinonemonthi.e.staffsalaries.
Longtermliabilitiesareobligationsthatarenotrequiredtobemetforatleastoneyear
ormorei.e.mortgages.
52
Equity/NetAssets/FundBalance
Equity shows the amount of funds obtained from other sources but not needed to
dischargeliabilities.Intheprivatesectormodel,equityrepresentstheamountoffunds
that should be available for shareholders or shareholder wealth. When a company is
privatelyowned,itrepresentstheworthofthecompanytotheowner.Forthepublic
sector,equityisrepresentedasnetdebtorsurplusorfundbalance.
FinancialStatementsAGeneralOverview
TheBalanceSheet
The Balance Sheet reports on the resources controlled by the organization. It is a
snapshot of the financial position of the organization. It is inclusive of all resources
regardlessofhowaccessibletheyareforcurrentuse.
AtypicalBalanceSheetforasmallorganizationisshownbelow.HopeforStreetKids
HSK is an organization helping homeless kids through counseling and by liaising with
schoolsandsocialagencies.
HopeforStreetKids
StatementofFinancialPosition
November30,2010
Assets
Liabilities
CurrentAssets
CurrentLiabilities
Cash
10,000
AccountsPayable
40,000
AccountsReceivable
20,000
AccruedWages
10,000
Inventory
50,000
TotalCurrentLiabilities
50,000
TotalCurrentAssets
80,000
LongTermLiabilities
FixedAssets
Bondspayable
200,000
Equipment
250,000
Mortgagepayable
150,000
Building
150,000
TotalLongTermLiabilities
350,000
Land
110,000
TotalFixedAssets
510,000
NetAssets
RestrictedFund(Perm)
100,000
UnrestrictedFund
40,000
Reserve
50,000
TotalNetAssets
190,000
TotalAssets
590,000
TotalLiabilities
590,000
53

TheIncomeStatement
Unlike, the Balance Sheet, which is a snapshot on a given day, the Income Statement
covers the financial transactions of the organization for a given period of time a
month,aquarter,ayear.Thisreportsetoutsthedetailsoftheorganizationsrevenues
andexpensesfortheperiod.
Organizationsmayuseanumberofdifferentwaystogrouptogetherorcategorizetheir
revenuesandexpensesintheIncomeStatement:
ByObject:salaries,benefits,rentals,costofservices
ByFunction:e.g.,research,clientservice,inspection,supportoradministrative
services
ByProgram:operationsunit,administrationunit,etc.
IncomeStatementOrganizedbyObject(PlusYeartoYearComparison)
HopeforStreetKids
IncomeStatement
FirstQuarterendingNovember30,2005
2005
2004
Revenues
GovernmentGrantsrestricted
17,500
15,000
GovernmentGrantsgeneral
0
2,000
Contributionsrestricted
4,000
7,500
Contributionsunrestricted
6,000
10,000
0
1,000
Fees
Interest
2,300
2,800
Total
29,800
38,300
Expenses
Salaries,benefitcosts
10,000
10,000
Rentals,equipment
2,000
2,200
Supplies
5,000
6,000
Aid to Kids: Program Grants, ShortTerm 19,000
23,000
FinancialAssistance,TravelHome
Total
36,000
41,200
Increase(Decrease)inNetAssets
(6,200)
(2,900)
TheStatementofCashFlows
Thoughmostpublicsectororganizationsusesomeformofaccrualaccounting,thereis
also a need to display changes in cash and cash equivalents resulting from the
organizationsactivitiesduringtheperiod.Thus,CashFlowsStatementismorenarrowly
defined, focusing on cash transactions as opposed to such noncash items as
54
depreciation. This Statement gives information about the current financial viability of
theoperation.
Cash flow statements typically report on the following categories of financial

information:
Cash flows from operations: This will include all cash receipts taxes, fees,
pledges and contribution and disbursements resulting from the main service
deliveryactivitiesoftheorganization.
Cashflowsfrominvestingactivities:Thisincludescashoutflowsrelatedtothe
purchase of capital assets and the purchase of investments and cash received
fromthedisposalofassetsofasimilarkind.
Cash flows from financing activities: This includes cash used to pay for prior
financial obligations and the acquisition of debt through bonds, loans, treasury
bills,etc.
Noncashfinancingandinvestingactivities:Certainfinancingandinvesting
activitiesdonotinvolvethereceiptanduseofcash.Forexample,contributions
ofcapitalassetsoraninvestmentportfoliotobeheldforanendowmentfund.
Conclusion
Thesimplerealityisthatyoucannotmakeagooddecisionwithoutgoodinformation
presentedinanunderstandableandpredictableway.Naturally,thisrealityappliesto
financialdecisionsandfinancialinformation.Finding,using,controllingandaccounting
forgovernmentresourcesdemandsareliableandcrediblefinancialandmanagement
accountingcapacitywithintheorganization.
Publicsectoraccountingistheunderlyingfoundationofthemanagementcyclewithin
publicorganizations.Theneedtohavestandardsthatprotecttheintegrityofthe
accountingsystemisgreat,especiallyinthepublicsectorwheretheusersinterestsare
varied,andcredibilityisabsolutelynecessaryandalwaysunderchallenge.Additionallya
standardreportingprocedure,andcommonreportingtemplatesincreasethe
legitimacy,transparency,andusefulnessofthefinancialinformationcollectedby
governments.
Whenfinancialinformationiscollectedandpresentedproperly,itsatisfiesthepublic
andempowersmanagersinthepublicservices.Itsupportsaninformedandevidence
basedpolicyprocess.
55
Section 8: Accrual Accounting: Providing a Fuller Story
Key Points
Whenpreparingfinancialstatementsandbudgets,governmentsareincreasinglyusing
anapproachtoaccountingcalled:AccrualAccounting.
A key attribute of accrual accounting and budgeting is that they provide information
thatmatchescoststotheperiodinwhichtheyareincurred.
Therefore,accrualbudgetingrepresentsamajorchallengetotheconceptofannualized
budgetsapprovedbylegislatures,althoughitinnowayreducestheauthorityofthose
legislatures. Accrual accounting also forces a better integration of finance, operations
andstrategicdirectionbecauseofitsinclusivenature.
Inthischapter,wewillexplore:
theneedforaccrualaccounting,
thecharacteristicsofcashaccounting,
thecharacteristicsofaccrualaccounting,
thedifferencesbetweenaccrualandcashaccounting,and
theimpactofaccrualaccounting
Why do we need Accrual Accounting?

There is a strong tendency in government to focus on how much cash is needed in a
public sector budget. This has lead to the dependence of the approval of cash
expenditures, otherwise known as appropriations. Appropriations are generally made
foraoneyearperiod,withsomeexceptionsforcapitalprojects.
Withtheaccrualsystem,thefullcostingisbetterdisplayedandnotrestrictedtoasingle
year.
Therestrictionofbudgetaryapprovalstooneyearatatimecandistortorfailtoreveal
the true overall cost over time of a particular program or purchase. Cash accounting
satisfies the annual budgetbased interests of legislators and is simple in its
presentation,buthasanumberofseriousdrawbacks,including:
Failuretoaccuratelyrepresenttheamountofresourceusage.For
instance,alargecapitalacquisitionwilldistortexpenditureupwardinthe
56
firstyearbuttheusageofthatassetwillnotberecognizedinfollowing
years.
Failuretotakeaccountoffuturecommitments,guarantees,orother
contingentliabilities.Aliabilitywillnotberecognizeduntilthecashis
paidtosettlethedebt.
Concentrationoncashpaymentsalone,sometimesresultinginan
unnoticeddeteriorationinfixedassets.
Cash Basis Accounting: An Overview

Ifanorganizationoperatesonacashbasis,itrecognizesincomewhenitreceivesitand
expenseswhentheyareactuallypaid.
Forexample,agovernmentprovidesaservicetooneofitsclientonDecember31st,e.g.
alicense.However,theclientdoesnotpayuntilJanuary31st.Ifthegovernmentuses
cashaccounting,itdoesnotcountthesaleasincomeuntilitcollectsthemoneyinthis
caseJanuary.
AnotherExampleofCashAccounting
Anewcomputersystembudgetedfor$2.5millionisbeinginstalledin20023and2003
4fiscalyears.Thecomputersareboughtonaccountand$1.75millionwillbepaidatthe
beginningofthefiscalyear.Thebalancewillbepaidatthebeginningofthenextfiscal
year.Acashbasedaccountingsystemwoulddisplaytheseitemsthisway:
ExampleofCashAccounting
FiscalYear
200506
200607
NewComputerSystem
1,750,000
750,000
Accrual Basis Accounting: An Overview

In accrual accounting, income is recognized when the income is earned, regardless of
whenpaymentisreceived.Expensesarerecognizedwhentheliabilityisincurred.
When an organization using an accrual basis for accounting sells a good, it places the
future payment for that good in an accounts receivable as part of its asset base.
Similarly, when it obtains goods and takes them into inventory from a supplier, it
recognizes two things: it has created a liabilityin the formof accounts payable, ithas
57
alsoincreaseditsassetbasebyaddingtoitsinventory.Inthisway,theorganizationhas
betterpictureofitsactualfinancialposition.
Accrualaccountingisthereasonfortheexistenceoftwomajoraccountsthatwehave
previously examined on the balance sheet. Accounts Receivable is the total of all the
monies owed to the organization. Accounts Payable is the total of all debts owed to
suppliers and vendors. For each transaction, a separate record is maintained with
detailed information on each customer or vendor. This detail is referred to as the
AccountsReceivableandAccountsPayablesubledgers.Thetotalofthedetailofeach
subledger must equal to the total on the balance sheet for each of the two major
accounts.
Example of Accrual Accounting
Taking the same computer systemreferenced in the previous section, to reflectwhen
the asset would actually be used, it is assumed that it has a five year life cycle. Even
though the actual cash outlay is the same as shown in the cash example, the accrual
systemrecognizestheexpensewhenitoccursnotwhenthemoneyispaid.Hence,an
accrual financial report would show the costs in the following way
FiscalYear
200405
200506
200607
200708
200809
Computer
System
500,00
500,00
500,000
500,000
500,000
Another distinction between the cash and accrual basis is that the accrual system will
recognize that assets depreciate over time and will include the depreciation as a non
cashliabilityincalculatingoverallfinancialposition.
The Difference between Cash and Accrual Accounting
ComparisonofTreatmentofPurchaseEventsunderTwoBasesofAccounting
Event
Articleorderedfromsupplier
ArticlearrivesinInventory
Cash
Noeffect
Noeffect
Articleisused
Noeffect
Accrual
Noeffect
Increaseaccountspayableand
IncreaseInventory
DecreaseinventoryandDecrease
fundbalance
58
Articleispaidfor
Decreasecash
Decreasecash
Decreasefundbalance
Decreaseaccountspayable
CashVersusAccrualTreatmentofAssetAcquisitionandUse
Transaction
Assetboughtbutnotpaid
for(oncreditoraccount)
Assetconsumedorused
Cash
Noentryi.e.recognitionin
accountingsystem
Noentry
Assetpurchasedoncreditis Decreaseincashandasset
paidforbycash
recognized
Servicedelivered
Noentry
Billsentforservice
delivered
Billpaidincash
Noentry
Accrual
Assetandliability
recognizedandrecorded
Useanddecreaseinasset
valuerecognized
Decreaseinliabilityand
cashrecognized
Revenueandaccounts
receivablerecognized
Noentry
Cashincreasedandrevenue Accountsreceivable
recognized
decreasedandcash
increased.
Implications of the Accrual Accounting

As the example below demonstrates, perceptions of financial health can be very
dependentontheaccountingsystemused.
Inthefollowingexample,wecanseethat,onacashbasis,thegovernmentisinsurplus.
Onanaccrualbasis,itfacesadeficit.Thisdeficitdoesnotmeanthegovernmentneeds
toimmediatelyraisecashtopaydownthedeficit.Rather,itmeansthatthefullfinancial
resourcesofthegovernmentaredisplayedsothatitsfullliabilitiesovertimeareshown.
Therefore,thegovernmentisnotcurrentlyinapositiontoincreasespendingasthecash
reportmightsuggest.
An example of this is the way in which pension obligations are managed. On a cash
accounting basis, the $30 million pension obligation is ignored until the pension
paymentsareactuallymade,usuallyyearslater.
Ontheotherhand,accrualaccountingimmediatelyrecognizestheobligation.Such
recognitionhasbothpositiveandnegativeimpacts,especiallyonpublicorganizations.
Asalreadynoted,itprovidesamoreaccuratepictureofthefullfinancialobligationsof
thegovernmentinquestion.Italsoforcesthegovernmenttotakethisobligationinto
accountasitmakespolicyandprogramdecisions.Suchinformation,especiallyexpenses
thatwillnotbedischargedforaconsiderableamountoftimeandwhosevaluewill
59
changeovertime,maynotberelevanttoshorttermdecisionmaking.Theymayhave
theperverseeffectofdampeningthecapacityofagovernmenttomeetshortterm
needs.
AnExampleofaWeekintheLifeofOneGovernment13
A series of financial events..

Thefollowingexamplesconsideraweekinthelifeofasmallgovernment.Theeffects
ofthefollowingfivetransactionsareshowninthefinancialstatementsbelow.
Corporatetaxpayersarerequiredtomaketaxpaymentsof$100
milliontothegovernmentbutonly$90millionisreceived.Attheend
oftheweek,$10millionisoutstanding.
Thegovernmentsellsfixedassetsfor$100million.Theassetshad
beenvaluedat$100million.
Governmentsalarypaymentsaremadeduringtheweek.Inaddition
topayingemployees$60million,thegovernmentisobligatedto
providefortheirpensionswhentheyretireemployeesearned$30
millioninfuturepensionrightsduringtheperiod.
Thegovernmentsettlesalongrunninglegaldispute.Itagreestopay
$30milliontotheplaintiffintwomonthstime.
Allthegovernmentsborrowingsareheldinforeignexchange.The
exchangeratedeclinedby2%duringtheweek.
13
AccrualBudgetingandAccountinginGovernmentanditsRelevanceforDevelopingMember
Countries,writtenbyS.LakshmanAthukoralaandBarryReid,publishedbytheAsianDevelopmentBank,
ISBN9715614884
60
FinancialReportsoftheGovernment
AccrualAccounting
Information
Cash Accounting
Information
Cash
Flow
Statement
Receipts
a.Taxation 90
b.
Asset 100
Sales
s/t
190
Payments
c.Salaries
Cash
Surplus
Bank
Balance
Opening
Closing
Operating
Statement
Revenues
a.Taxation
s/t
Expenses
c.
Personnel
Costs
60 e. Foreign
Exchange
d.
Litigation
Expense
130 s/t
50
180 Accrual
Deficit
BalanceSheet
100
100
Assets
Bank
Receivables
Opening
50
20
Changes
130
a.10
Closing
180
30
90
FixedAssets
s/t
700
770
b.100
40
600
810
10
Liabilities
30
Litigation
d.30
30
130
Pension
Liability
Borrowing
s/t
c.30
30
500
500
e.10
70
510
570
30
30
240
240
30
NetAssets
270
Equity and 270
Reserves
Note:Cashaccountingwouldreporta$130millionsurplus,whiletheaccrualoperating
statementshowsa$30milliondeficit.The$160milliondifferencearisesfromthefact
thatcashaccounting:
ignoresthepensionliabilityof$30millionasitisafuturecashoutlay,
theassethadavalueequaltoitssalepriceof$100millionandthiswould
bereducedfromfixedassetsinventory
61
theexchangeratechangeloweredthevalueoftheforeignexchange
borrowingsby$10million,
thejudgmentcreatedaliabilityof$30millionwhichthecashsystem
wouldonlycaptureintwomonthstimewhenthepaymentwouldbe
made,and
outstandingtaxestobereceivedof$10millionremainedpayabletothe
governmenteventhoughtheyhadnotbeenreceived.
The Pros and Cons of Cash and Accrual Accounting and Budgeting
Someoftheadvantagesofthecashsystemofaccountingandbudgetingarethatitis:
simple
linkswithcashbudgetandtaxationsystems
easytounderstand
easytoauditandcontrol(withinitsownparametersofbeingfora
specifiedperiodanddealingonlywithcashrequirements)
Theriskstoacashapproachinclude:
theabilitytomanipulatecashflowsoverreportingperiods(especiallyfrom
reportingperiodtoreportingperiodtominimizedeficitsoroverexpenditures)14,
thetendencytospendallavailableresourceswithinthefinancialyearand,with
someexceptions,failuretopermitinterperioduseofcashfunds,
assetsandliabilitiesignored,therebydistortingthetruefinancialsituation,
cashstatementdoesnotprovideafullpictureofthefinancialpositionespecially
forshortandlongtermliabilities,asnoted,butincludingdepreciationaswell,
nolinkwitheconomicanalysesororganizationaloutputs.
Accrualaccountingiscertainlymorecomplexanddifficult.Itdoes,however,havethe
advantageofprovidingmoreusefulfinancialinformation.Someoftheotheradvantages
oftheaccrualbasisare:
accrualaccountingismorecompletethancashandprovideafullbalance
sheetapproach,
scopeformanipulationofcashisremovedwithanunderstandingthat
issuesofmanipulationareneverfullyremovedfromanyaccountingor
budgetingsystems,
facilitatesbetterqualityfinancialmanagement,
14
Ofcourse,accrualaccountingfacesthesameproblemwiththeissuerecognizingincome.
62
forcesfullrecordingofassetsandtheiruse,includingtheirdepreciation
andreplacement,somethingthatgovernmentsinparticularhavebeen
remissinsystematicallyprogrammingintotheirspendingplans,
providestheopportunitytochangeorganizationalbehaviourthrough
anticipatingwaystoeithermanagefutureliabilitiesorfullyassessthe
costofreplacingdepreciatingassetsinasystematicway.
providesbetterassessmentoffinancialhealthandcanlinkmoreeasily
withorganizationalperformancedata.
Therisksassociatedwithaccrualaccountingare:
itcanbeseenasatechnocraticexerciseandnotdrivenbymanagementneeds
especiallywhenitislefttothefinancialexperts;
alackofadequateaccountingstandardsmaymeanthattheinterpretationofthe
financialinformationfromaccrualaccountingwillhavedifferentmeaningsfor
differentusers,standardscapableofmanipulation;
theremaybeapoorlinkagetobudgetinformationwhenthebudgetsarestillona
cashbasismakingtheunderstandingoffinancialreportingdifficulttofollowand
createtheneedforcrossoverreportswhichcanleadtoconfusion.
politiciansordirectorsmaynotimposefiscaldiscipline,e.g.costofcapitalor
demandforfullcostimplicationsofintergenerationalliabilitiessuchaspensions,a
matterofleadershiporwillthatnosystemwillrectifyorreplace;
managementunwillingorunabletouseaccrualinformationtoimprovecontrolof
resources,effectiveoversightormakechangesasaresult;
managementadoptsaccrualbasisforexternalrequirementsbutstilloperatesblack
booksystemsonoldbasis;15
opensthepossibilityofotherformsofmanipulationssuchasseenintheprivate
sector,e.g.therecognitionoffictionalincome;
Producesreportsthataremoredifficulttounderstandanduse.
15
ManyofthepointsoutlinesherewereraisedbyNoelHepworthinapresentation,AccrualAccounting
inthePublicsectorNovember,2004,Ankara,CharteredInstituteofAccountancyandPublicFinance,
(UK)butextensivelyrevisedbytheauthor.
63
Conclusions and Overview

Argumentshavebeenmadethattheintroductionofaccrualaccountingandbudgeting
systemmuddythewatersoflegislativeoversight.16Thetraditionofanannualvotingof
appropriations, i.e. the actual funds needed to run programs, is inherent in the
parliamentarysystemsofmostcountries.Whiletherehasbeenstrongpoliticalsupport
toimprovefinancialinformationandreporting,theaccrualbasisdoesrequireapolitical
frameworkthatdemandsalongertermperspectiveandunderstandingofslightlymore
complexaccountingnotionsthanhavebeenusedtodate.
Fromafinancialmanagementperspective,accrualaccountingprovidesgreat
information.Itisatrendthatisrapidlybecomingthenorminpublicsectoraccounting
16
AllanBarton,TheUseandAbuseofAccountinginthePublicsectorFinancialManagementReform
ProcessSchoolofBusinessandInformationManagement,AustralianNationalUniversityNational
InstituteofEconomicsandBusiness,PublicLecture4June2003,
64
Section 9: Accountability and Reporting
Key Points
Accountabilityisaconceptwithabroadreach,especiallyforpublicsectororganizations.
Itstraddlesthedividebetweenoperationalprocessandmanagementandcontrol.It
alsoappliestotheinternalmanagementandcontrolofpublicsectororganizationsin
termsoftheeffectivenessofthosecontrols,theefficiencywithwhichtheorganization
carriesoutitsworkanditsadherencetothelawsandrequirementsforprobity.These
elementsformthebasisofwhatiscalledexecutiveaccountability,appliedtothe
internalmanagementoforganizations.
However,accountabilityalsoappliestoexternalauthoritiessuchasthelegislatureand
externalagenciesofreview,mostnotablylegislativeauditors.Heretheaccountabilityis
torenderanaccountofonesdutiesandreporttothatauthorityontheexecutionofthe
responsibilitiesthatyouhavereceivedfromthem.Inthiscontext,italsomeanstobe
subjecttoscrutiny,questioningandformalreview.
Accountabilityalsoextendstorelationshipswithserviceprovidersbothwithinthe
publicsectorandintotheprivatesectorthroughcontractedservices,contribution
agreementsandfundingsupports.Theserelationshipsincludesomeformofreporting
oraccountingforthefunds.
What is Accountability?
Accountabilityistherequirementtoexplainandacceptresponsibilityforcarryingout
anassignedmandateinlightofagreeduponexpectations.Itisparticularlyimportantin
situationsthatinvolvepublictrust.However,acommitmenttoaccountabilityshouldbe
thoughofnotonlyasansweringtoexternalaudiences,butalsoasaconstructivetool
fororganization,development,enhancingmanagementpractices,selfevaluationand
strategicplanning.
Theapplicationofaccountabilityinvolvesthreeelements:
Takingintoconsiderationthepublictrustintheexerciseofresponsibilities;
Providingdetailedinformationshowinghowresponsibilitieshavebeencarried
outandwhatoutcomeshavebeenachieve;and
Acceptingtheresponsibilityforoutcomes,includingproblemscreatedornot
correctedbyanorganizationoritsofficialsandstaff.17
17
Panel, op. cit, p. 11
65

Whatthen,aretheprincipalcharacteristicsofaccountabilityrelationshipsinthepublic
sector?
AssignmentofAuthority,PowerandResources:Thisisthedownward
delegationofdutiestoanindividualororganization.Thiscanbebylaw,by
policy,bywayofformaldelegationmatricesorbythecompletionofan
organizationalworkplan,budgetdistributionandperformancecontracts.Itcan
alsobeimplicitorindirect,suchasusingformalpositiondescriptionstodescribe
dutiesthathavedelegationsofauthorityinthemandstatementofexpected
dutiestoperformand,possibly,outcomeexpectations.
AccountabilityforPerformanceandResults:Thisistheyinandtheyanabove.
Inacceptingtheauthority,powerandresources,theindividualororganization
alsotakesontheresponsibilitytoperformtheworkandaccountfortheresults.
AssignmentofDuties:Inassigningdutiesformally,thegrantingauthorityalso
providescleardirection,legislativeorregulatoryguidance,resourcesconsistent
withtheexpectation.
RequirementtoReport:Thenecessitytoreportinaformalway,often
prescribedbythegrantingauthoritydealswiththreeelements:
Resultsachieved
Compliancetolegalandproceduralrequirements,and
Efficiency.
JudgmentExercised:Atsomelevel,beitwithintheorganizationandwiththe
publicatlarge,publicsectoraccountabilityinvolvestherightofthegranting
authoritytomakejudgesabouthowtheaccountabilityhasbeenexercisedand
actonthatjudgment.Intheultimatetestinademocracysuchasours,thatmay
meanthedownfallorreelectionofagovernment.Inmoremundaneterms,it
maybecleanbillofhealthonafinancialstatementbyalegislativeauditor.
The Relationship of Accountability and Financial Management

Financialmanagement,becauseofititssystematicreportingcharacter,isanimportant
toolofaccountability.Financialreportscontaininformationinaprescribedand,at
times,legislated,format.Theyalsoindicatehowtheindividualororganizationhas
providedgoodmanagementandstewardshipoffunds.Theycanprovideinformationon
theresultsachieved,althoughonlyalimitedways.
Goodfinancialmanagement,therefore,canbeattheheartofestablishing
accountability.Oneofthefeaturesofpublicsectoraccountabilityisthatitistransient
andvolatile.Regardlessoftheadequacyofreportingtoolsandtheconfidenceinthe
system,muchdependsontrustinthoseprovidingtheinformation.Havingsound
financialsystemsthatproducereliabledataisameansofestablishingsuchtrust.
66
The Users of Financial and Performance Reports

Publicorganizationshaveanumberofaudiencesforwhomfinancialperformance
reportsareprepared.Whousesthisinformationvariesbroadly.
However,thereareanumberofinterestedandengagedparties:
Citizens:Theultimateaccountabilityforgovernmentsandformanyvoluntary
organizationsistothecitizenstheyserve.Theyare,afterall,theprimefunders
ofgovernments.Moreimportantly,theyelectthegovernments.
Media:Fromtimetotime,themediawillneedtolookatastatementoffinancial
positionor,atleast,someofthereportsonperformanceinkeyareasoftheir
concern.
InterestGroups:Thosewhorepresentrecipientsofservices,advocatesfor
particularcauses,orthosewhoserveasgeneralwatchdogbodieswillwantto
usefinancialinformationthattheorganizationprovidesasawaytounderstand
whatisgoingon,toassesstheorganizationseffectivenessordetermineiftheir
groupsinterestsweremet.
ResearchBodies:TheCanadianTaxFoundation18isanonprofitbodywhich
conductsextensiveresearchintothetaxsystem.Indoingso,itprovidesmore
insightintofinancialmanagementissues.
LegislaturesandBoardofDirectors:Thesearetheauthorizingandlegislating
bodiesthatretainownershipoftheorganizationsinlegalterms.Theysetthe
rules.Theyhavetheultimateaccountabilitiestocitizensororganization
members.
ExternalOversightBodies:Whilewewilldealmorefullywithexternalauditors
andotheroversightbodieslateroninthisChapter,theyplayanimportantrole
inbothservingthelegislaturesthatcreateasindependentreviewersofboth
financialinformation,andthemaintenanceofaccountingprinciples,appropriate
financialmanagementpracticeaswellasissuesofefficiencyandeffectiveness.
InternalOversightBodies:Similartotheabove,organizationswillcreateinternal
auditandevaluationgroupstomonitorandassessfinancialreports.
CentralAgenciesofGovernment:Centralagenciesmusttakewhatistermeda
wholeofgovernmentviewoffinancialinformationandperformanceaudits.
However,theirroleinprovidingthisviewisdependentuponthequalityofthe
informationthatisprovidedbythemanydepartmentsandagenciesofthe
government.
SeniorManagerswithinAgenciesandGovernment:Financialinformationand
reportsareusedinternallyaswellasexternally.Therefore,thereareusers
withinorganizationsthathaveastronginterestinboththeintegrityofthe
informationformonitoring,decisionmakingandtrackingperformance.
18
http://www.ctf.ca
67
IndividualDonorsandFundingOrganizations:Itishighlyunlikelythatfunding
organizationswillprovidemorefundingwhentheyloseconfidenceinthe
organizationsabilitytomanageitsfinances.Similarly,somepublicorganizations
mayhavedirectoversightandcontrolrolesinrelationshiptootherpublic
organizations.Thisismostprevalentinthegovernment/voluntarysector
interface.Financialreportinganditsqualitymayhaveaneffectonthelongterm
financialsupportthatisgiven.
Creditorsandcreditratingorganizations:Applyingtobothgovernmentandthe
voluntarysector,oneofthefirstconcernsofanylenderwillbethefinancial
conditionoftheorganizations,beitatown.
The Objectives of Financial and Performance Reporting

Nowthatwehavelookedatwhopublicsectororganizationsareaccountableto,wewill
lookatwhattheymaybeaccountablefor.
Providingreportsshould,makeitpossiblefortheusersofthisinformationto:
assessthedischargeoftheaccountabilitytakenon,and
makedecisionsaboutthepublicgood,themeansofdelivery,theresources
allocatedtoitandthepoliticalconsequencesofallofthis.
Todothis,effectivepublicsectorfinancialandperformancereportingshouldmeet
certainobjectives:
Toprovideameanstodemonstratetheorganizationsaccountabilitythatenable
userstoassesthataccountabilityinamannerthatismutuallyaccepted.
Toprovidesufficientinformationtopermituserstoassessthefinancialviability
oftheorganization,toassesswhethercurrentrevenuesandexpenseswillmeet
programobjectivesorimposefutureliabilitiesoneithertaxpayersordonors.
Toshowthattheorganizationiscompliantwithitslegalfinancialreporting
requirements.
Toshowthattheorganizationiscompliantwithitscontractualagreements
and/orrequirements.
Toprovideinformationneededtoevaluatetheorganizationsoperatingresults
fortheperiodunderreview,including:
o Sourcesandusesoffinancialresources
o Objectives,standardsandobligationsandhowtheyweremet
o Changesinfinancialconditionandviability
Toprovideinformationabouttheorganizationslevelofserviceandcapacity.
68
The Role of Audit in the Accountability Process

Effectiveinternalandexternalauditsystemsexisttoservetheneedforpublic
accountability.However,theyarenotaccountabilityitself.Thatrestswiththeindividual
ororganizationthathastakenontheresponsibilitiesandpowerstodosomethingand
mustaccountinapublicwayforit.Audits,intheirvariousforms,areacontroltoolto
beusedinbothassessingperformanceandholdingthoseaccountableresponsiblefor
compliancetoboththeirownobjectivesandthemeansapprovedtoachievethem.
Attheheartoftheuseofauditistheneedforpublicandindependentassuranceson
twofronts:
Attestationthatmanagementsinformationisfairlyandcompleterepresented,
beitfinancialinformation(forthemostpartitis)oranyotherinformationthat
managementoffersandthatitispresentedinconformancetopractice,
standardsandrules.
Assessmentandreportingonmanagementsperformanceincomparisontothe
approvedpurposesoftheprogram,itsstatedobjectivesandgoalsaswellas
needforeconomyandefficiency.
InternalAuditFunctions
Themanagementsystemofanorganizationinthepublicsectormustbeableto
demonstratethatitcancontrolitsresources.Animportanttoolofexercisingthat
controlishavinganinternalauditcapacity.
Someofthefunctionsofaninternalauditare:
toreviewandprovideadviceonoverallcontrolsystemsoftheorganization,
toassessprojectcontrolcapacityforlarge,highriskprojects
toensurethatadequatemeasuresareinplacetominimizetheftorfraud
toensurethatgrantandentitlementdecisionmakingreduceserrorstoa
minimumtopreventoverpaymentandtheneedforrecovery
toensurethatregulationscoveringhowfundsarespent,recordedand
controlledareadheredto
toattesttotheaccuracyoftheinformationinthefinancialandreportingsystem.
Theadvantageofagoodinternalauditsystemisthatitenhancescontrolforthe
organization.Itpermitstheorganizationtothinkaboutitsrisks,setsupasystemfor
auditingriskssuitedtoitsneeds,andgetsattheerrorsbeforeexternaloversightbodies
do.Thesearevaluableassetsinthecontrolofcomplexpublicorganizations.
69
LegislativeAuditors
Legislativeauditorsareappointed,generallythroughaCabinetdecision,toserveand
reportongovernmentwideissues.Theyareindependentofgovernmentandreport
directlytothelegislatureofthejurisdiction.
Fromtheviewoflegislators,thevalueoflegislativeauditorshasnotsimplybeenintheir
technicalexpertiseithasalsobeenintheirabilitytoconductauditsthatmaynot
pleasethosebeingexamined,andtoreporttheirfindingspubliclyandindependently.
Theyhavesubjectedtheoperationsofthepublicsectortoregular,independent
examinations,actinginthepublicinterest,asadvocatesoftransparentgovernment.
Independence
Independencethestateofbeingimpartialandfreefrombiasandconflictsof
interestisthecornerstoneofauditing.Anythingthatimpedesanhonestand
straightforwardapproachtotheperformanceofanauditwillreducepublicconfidence.
InCanada,legislativeauditorshavetoworkatearningtheconfidenceoflegislatorsand
thepublic.Thefactthatthisindependenceisbackedbylegislationinstillspublic
confidenceintheprocess.
ThepracticesusedintheappointmentofanAuditorGeneralvaryacrossgovernments.
However,inallcases,thelegislatureisinvolvedinsomewayinensuringtheir
independence.Theyhaveassuredthisindependenceinanumberofways:
Thelegislatureusuallyhassomeinvolvementintheappointmentofthe
auditor.
Appointmentsaregenerallyforfixedterms,withremovalpermittedonly
forcauseorincapacity.
RemunerationoftheLegislativeAuditorisusuallyattachedtoareference
group,topreventgovernmentsfromchangingpaylevelswhenonetoo
manybadreportscomein.
Legislationprovideslegislativeauditorswithimmunityfromlegalaction.
Legislationallowslegislativeauditorstodecidehowbesttoundertake
audits(forexample,byusinginhousestaff,contractedstaff,or
contractedfirms).
ReportingtotheLegislature
Legislativeauditorsgenerallyreportdirectlytotheirauthorizinglegislatures,atleast
annually,onanythingtheythinkshouldbebroughttothelegislatorsattention.The
auditorsreportsbecomeamatterofpublicrecordandcoverawiderangeofissuesof
interesttolegislatorsandthepublic,includingcompliance,propriety,theeconomy,and
theefficiencyandeffectivenessofgovernmentoperations.LegislativeAuditorsalso
70
havedirectaccesstoeachlegislaturesPublicAccountsCommittee.Thisprovidesthem
withaformalmeansofdiscussingtheirreportedauditfindingswiththelegislators.
ThirdPartyAccountabilityandtheBurdenofOversight
OverthepasttwentyyearsandcloselyassociatedwiththeNewPublicManagement19
phenomenoninvariouscountries,contractingofserviceshasincreased.Thirdparty
deliverybyprivateornonprofitentitieshasincreasedinarangeofgovernment
services.Manygovernmentsviewthisflexibilityindeliveryaspositive.Theybelievethat
theycanrealizesavingsinbuyingratherthanbuildingservicedeliverytools.Further,
throughtheintegrationofbackroomservices,i.e.thosesupportfunctionsthat
generallyhavenopublicprofile,theycanrealizethebenefitsofbothcentralizationand,
tosomedegree,outsourcing.Finally,thesearrangementscanallowgovernmentsto
decentralizeandlocalizeservicedeliverytothepublicthroughcontractingthatmatches
localcircumstances.
However,despitethemanybenefits,theaccountabilityquestionsraisedthrough
contractingforservicesandusingthirdpartiesaremany.Someare:
Dothesamestandardsofaccountabilitythatapplytogovernmentalsoapplyto
nongovernmentalproviders?
Arereportingrequirementsthesamewhentheobjectiveofcontractingisto
focusonresults,notprocess?
Isthepublicagencydoingthecontractinglessabletobeaccountablefor
financialprobityandconformancetorules?Isyes,howdoesitensurethistakes
place?
Doesthepublicagencymanagingthecontractbecomeaformofauditoraswell
asabuyerofservices?
Doprivateorpublicsectorfinancialstandardsapply?
Whatisthecostandburdenespeciallyforvoluntaryagenciesintermsof
reporting?
Thekeycontrastwiththeprivatesector,andtoacertaindegreewiththevoluntary
sectoristhat,whilethesesectorstendtofocusonresultsoftheirefforts,government
focusesbothonresultsandprocess.Someofthedifficultythatthevoluntarysector
confrontsindealingwithgovernmentisthatprocessdemandsforreports,conformity
withgovernmentstandards,detailedinformationneedsoverwhelmtheresults
19
TheliteratureonNewPublicManagementisexhaustive.However,LesterSalamon,op.cit,providesa
goodoverviewofthemostrecentdevelopments.Similarly,PeterAucoin,theNewPublicManagement:
CanadainComparativePerspective,Montreal,InstituteforResearchonPublicPolicy,1995,isagood
earlyintroduction.Foramoreretrospectivelookaroundtheworld,seeTHEAGENCYCONCEPTINNORTH
AMERICA:FAILURE,ADAPTATION,ANDUNEXPECTEDBENEFITS,AndrewGrahamandAlasdairRobertsin
UnbundledGovernment,editedbyChristopherPollittandColinTalbot,Routledge,2003
71
intentionsofthearrangement.Thisrobsthearrangementofthebenefitthatisderived
fromhavingthevoluntarysectorinvolvedinthefirstplace.
Excessivedemandsbygovernmentfordetailedlevelsofaccountabilitycanbothcripple
thevoluntaryorganizationandrenderthereasonforthearrangementinthefirstplace
creativity,localdelivery,uniqueskillsetofthevoluntarysectorsomewhatuseless.
Theypointoutthefollowingchallenges:
Moredetailedreviewandreporting
Thinkingsmallandinsidethebox:projectdesignandaccountabilityarehighly
riskaverseandtendtowardsprocesscomplianceratherthanprogramand
resultsperformance
Delaysinapprovalandrenewalprocessesduetothemoreonerouscontract
negotiationandreportingdemandsofgovernment
Changeinroleofgovernmentprojectofficerfromfunderanddeveloperof
programmingtocontrollerandmonitor
Arushtooutputandoutcomemeasurestomeetcomplianceneedsoverlonger
termperspectives,especiallyinareasofsocialservice,wheremuchofthe
voluntarysectorsstrengthlies.20
Establishingeffectivecontractmanagementtoenablegoodfinancialadministration
demandsthatcertainfeaturesoftherelationshipbewellstructured.Someoftheseare:
Aclearunderstandingofthedesiresoutcomesordeliverables
Cleardefinitionsofaccountabilitiesofallpartiesinvolved
Goodcosting,notonlyoftheservicesorgoodsdeliveredbutalsotheoversight
costs
Appropriatecontractdesignandcontractprocessadministration,includingthe
additionofprobityauditsinrealtimeforhighriskcontractingprocesses
Clearguidelinesonreportingrequirementsbybothparties
Anagreedcashflowarrangement
Effectivecontractgovernancetoenableproblemsolving
Appropriatepostcontractevaluation.
Thirdpartycontractinginnowaydilutestheaccountabilitiesofpubicofficialsforthe
publicgood.Itcomplicatesthataccountability,however.Thecostsofthesenewforms
ofaccountabilityhavetobefactoredintotheoverallassessmentoftheuseofathird
partyinservicedelivery.However,thesamehastobesaidforthecostofeffective
accountabilitywiththetraditionalstructuresofthepublicsector.Neitherisfree.
20
ibid., pp. 458-462
72
Conclusion
Effectiveaccountabilityisthetouchstoneofpublicsectormanagementingeneraland
financialmanagementspecifically.Theeffectivemeasuresthatpublicsector
organizationsusetoreportontheirperformance,explaintheactionsandprovide
transparencyinbothinformationandprocessesestablishtheircredibilityandenable
theirpoliticalmasterstoexercisetheiruniqueaccountabilitieswithinthedemocratic
frameworkinwhichtheseorganizationsoperate.Similarly,withinorganizations,the
establishmentofclearlinesofresponsibility,wellunderstoodobjectives,arobust
meansofmeasuringandholdingindividualsandmangerstoaccountofthe
responsibilitiesthattheyassumeisameasureofthehealthoftheorganization.
Unfortunately,inthepublicsector,exercisingeffectiveaccountabilitycanbetempered
byahighlypoliticizedenvironment.Nomeasureofeffectiveannualreportingwilldrive
outthetaintanddamageofaspecificincident,beitfraud,misuseoffundsorpolitical
interferenceintheuseoffunds.Thisatmospherecreatesariskadverseculturewhichis
incapableofdistinguishingbetweenthepotentiallyembarrassingexceptionandthe
generalruleofgoodmanagement.Infact,theonenegatestheother.Thereisnosuch
thingasariskfreeenvironment.Inturn,thereisnoamountofaudit,internalor
external,thatcanpreventindividualsfromactingillegally.Theothertruthisthatthe
costsofcontrolsimposedasaresultofsinglyincidentsoftenoutweighthetrueriskof
fraudormisuseoffunds.
Thechallengeremainsinthepublicsectortoaggressivelydealwithfraudandpolitical
interference.However,thereactionshouldbeproportionaltotheaction.Theresponse
shouldmatchtherisk.
73
74

Section
1.TheNatureofPublicSector
FinancialManagement
2.CornerstoneOne:Allocating
ResourcesBudgets
3.UnderstandingtheBudgetary
Process
4.Budgeting:CapitalPlanning
5.CornerstoneTwo:Monitoring
MoneyManagerialControl
6.CashManagement:InYear
Control
7:CornerstoneThree:ReportingOn
HowMoneyIsSpentAccounting
8:AccrualAccounting:Providinga
FullerStory
Section9:Accountabilityand
Reporting
SubSection
Page
3
8
TheBudgetCycle
BudgetMethodologies
8
9
14
BudgetsandPlanningCycles
GettingApprovaltoSpend:TheAppropriationProcess
14
18
21
21
22
24
26
29
CapitalBudgets
ToolsofCapitalPlanningandBudgeting
TimeValueofMoney
RiskAssessment
WhatisManagementControl?
RiskandRiskManagement
ControlProceduresandPolicies
TrustandEthicsinControl
ControllershipCapacityChecklist
29
30
32
33
35
39
ObjectivesofEffectiveCashmanagement,Monitoring
andControl
EstablishingaCashManagementSystem
MonitoringFinancialPerformanceandVarianceAnalysis
ReallocationandReadjustment
39
40
42
46
49
AccountingPrinciples
TheOutputsofAccounting
FinancialStatements AGeneralOverview
49
53
58
63
WhydoweneedAccrualAccounting?
CashBasisAccounting:AnOverview
AccrualBasisAccounting:AnOverview
TheProsandConsofCashandAccrual
63
64
64
69
72
WhatisAccountability?
TheUsersofFinancialandPerformanceReports
TheObjectivesofFinancialandPerformanceReporting
TheRoleofAuditintheAccountabilityProcess
72
74
75
76
75

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Public Sector

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Question 1: What is the Public sector?

Public Sector Financial Management for Managers

Question 2: What is Financial Management?

The Budget Cycle

In governmental terms, the expenditure plan represents the authorized limit of

Public Sector Financial Management for Managers

The financial information is organized according to the types of expenses or cost

400 .Professional Fees

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Budgets and Planning Cycles

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Getting Approval to Spend: The Appropriation Process

Public Sector Financial Management for Managers

Governments will be continually looking for ways to improve efficiency of current

Public Sector Financial Management for Managers

A challenge for many countries is getting a true picture of government expenditures.

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Tools of Capital Planning and Budgeting

Public Sector Financial Management for Managers

Time Value of Money

Relationship between Future Value and Present Value

Public Sector Financial Management for Managers

Examples include highlevel concerns related to the decision to undertake an

BC Capital Asset Management Framework

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Section 5: Cornerstone Two: Monitoring Money

What is Management Control?

Management Control Framework

Systems Theory and Management ControlBy:Dr. Shahid Ansari:

Public Sector Financial Management for Managers

Risk and Risk Management

Public Sector Financial Management for Managers

POTENTIAL RISK MANAGEMENT ACTIONS

Must manage and

Risks may be worth

Public Sector Financial Management for Managers

Control Procedures and Policies

Public Sector Financial Management for Managers

Trust and Ethics in Control

Values and Ethics Approaches

Political and senior management leadership that promotes ethical

Clear statements of values and ethics or codes of conduct

Approaches to decision making that

o require consideration of values and ethics

o align management policies to support ethical conduct

o offer recourses to report ethical concerns

Assessment of and reporting on effectiveness of values and ethics

Source: Organization for Economic Co-operation and Development (OECD),

Public Sector Financial Management for Managers

Controllership Capacity Checklist

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Public Sector Financial Management for Managers

Section 6: Cash Management: In-Year Control