Financial Management Reforms In Government Have Produced Worthwhile Change - Essay Example

FINANCIAL MANAGEMENT REFORMS IN GOVERNMENT FINANCIAL MANAGEMENT REFORMS Insert name Insert grade course Insert instructor’s name August 31, 2011. Introduction The reform of government financial management systems in the past decade has seen developments in accrual accounting as well as in results-based budgeting and reporting. Financial management reform has been a key element of the wider strategy of Public Sector Reform, especially in Australia and United Kingdom. Changes to financial management practices have both expressed and carried the wider managerialist strategy. The main question guiding the essay is the extent to which managers are actively using financial management and performance-measurement techniques to assist in decision-making. Moreover, the essay will consider the extent to which the emphasis on results and the achievement of greater efficiency and effectiveness has impacted upon the structures and processes of agencies engaged in program and service delivery along with linked policy advising. The paper seeks to discuss how the introduction of new budgeting and reporting systems in the Australian public sector has influenced decision-making in the agencies required to implement the change (Stewart, 2007). Financial management reforms in Australia In the lat decade governments have been vigorously reforming their financial management systems. Accrual accounting has become increasingly accepted by OECD countries as the suitable way of financial reporting. Nevertheless, aligning accrual-based budgeting and accounting is less developed. There is much greater acceptance of accruals for financial reporting than for budgeting purposes. Results-based budgeting and reporting is becoming the norm. The more performance-oriented focus calls for a enhanced integration between the procedures of planning and budgeting, although there are exceptional matters to be resolved in incorporating financial and broader performance reporting and actions to be developed. Australia is one of the forerunners with regard to financial management reforms. Since the early 1980s the Australian government has developed initiatives to make budget and management system more result-oriented, for instance, the introduction of programme budgeting in 1983 (Australian National Audit Office, 2001). From mid 1990s, there was experienced increased focus on an integrated, comprehensive reform agenda. In 1995, it was concluded that departments would have to report on an accrual basis. The policy tool was the introduction of three novel pieces of legislation to replace the Audit Act of 1901. Consequently, the presently pertinent pieces of legislation are the Commonwealth Authorities and Companies (CAC) Act 1997, the Financial Management and Accountability (FMA) Act 1997 and the Auditor-General Act 1997. In 1996, it was concluded that an accrual-based outputs and results budgeting and reporting framework would be introduced in the Australian public sector. This framework was for the first time implemented in the budget of 1999/2000 (Australian National Audit Office, 2001). Since the financial year 1999/2000, the Australian government has worked with accrual-based results and outputs budgeting as well as reporting framework (Chan et al 2002). The outcome is that in Australia appropriations are now openly made for results in the appropriation bills. The Portfolio Budget Statements then offer extra particulars and clarifications of the budget to enlighten senators as well as members of the public of the projected allotment of resources to government results. Therefore, under the Australian results and outputs structure, appropriations are planned around results, while Portfolio Budget Statements indicate the price, quality as well as quantity of outputs agencies will deliver along with the decisive factor they will use for showing the contribution of agency outputs and administered items to outcomes (Chan et al, 2002). An additional result of the new structure is that amounts appropriated are now based on the full cost of delivering outputs and outcomes rather than the anticipated cash outflow for the year (Department of the Parliamentary Library, 2002). Financial management reforms in United Kingdom Just like Australia, UK has put great emphasis on establishing result-focused management systems. This emphasis has shifted from a focus on inputs and process to one on outputs and increasingly, outcomes. In 1995, the UK government took the first step to introduce an accrual accounting and budgeting system through the White Paper Resource Accounting and Budgeting in Government (Ellis, and Mitchell, 2002). This was majorly propagated by the need to improve the accountability of departments to parliament. The reform has been officially fixed in the Government Resources and Accounts Act (GRAA) of 2000. Consequently, in April 2001, the British government moved to a new resource-based financial management system. The results of this have seen the cash-based Appropriation Accounts being replaced by the resource (or accrued-based) Estimates (HN Treasury, 2001). For every department the Estimates are currently accrual-based, but also contain information concerning the cash requirements. Effects of the results-oriented financial management reforms Parliamentary control On one side, it can be seen that parliamentary control has increased after the introduction of the reforms. Parliament now receives information that it did not receive before reforms. It can now see clearly to what outcomes the means contribute. Additional information concerning the relation outcomes-outputs-activities-inputs is given. For the financial year to be closed, departments and organizations have to report on the costs and the outcome/output information. Therefore, it can be clearly shown that the reforms have a great potential for increasing parliamentary control since a lot of new information has become available to parliamentary scrutiny. On the other hand, an argument can be put that parliamentary control has weakened because authorization now takes place on an extremely aggregated level and because the complexity of the budget and accounts has increased. In Australia, approval takes place at the outcome level while in the UK approval is done for the Requests for Resources (RfRs) which match with outcomes the government desires to attain. This aggregated level of approval results in Parliament losing sight of the additional comprehensive and well-known information (Department of the Parliamentary Library, 2002). Furthermore, Australian politicians have been perplexed because of the concurrent execution of an accrual financial statement and an outcome financial statement. Agencies have often become accustomed to their outcome and output structure, which has led to a less transparent budget for the Members of Parliament. Due to the instability of the outcome and output structure, it is very hard to see the evolution of the resources over time. Moreover, the number of outcome categories has diminished. The weakened intelligibility of the fiscal system has greatly reduced parliamentary control. In addition, the complexity of the accrual-based financial system has weakened parliamentary control since most of the members do not understand the accrual-based budgets and accounts (Blöndal, 2003). Political primacy and accountability The consequences of the results-oriented fiscal management reforms on political primacy and answerability are discussed in this section. Political primacy means that government strategy ought to be instituted by politicians and not by public servants. Parliament and government decide on the social consequences to attain as well as the policy instruments to use. On one hand, reforms might increase answerability within the executive branch, between independent agencies and departments as well as between departments and the central budget office. On the other hand, there might be a strengthening of political answerability and transparency, as much to Parliament as to the public (Blöndal, 2003). It is evident political primacy and answerability has formally benefited from the results-oriented financial management reforms. In Australia, the resources are currently appropriated for the social effects or outcomes politicians desire to attain. The outcomes are further specified in the Portfolio Budget Statements (PBSs) by means of the outputs agencies will deliver as well as the criteria through which they will show the contribution to outcomes. The effects are reported by means of outcome indicators in the annual reports of the agencies. In the UK, appropriations are made for Requests for Resources which can be seen as outcomes the government wants to achieve. The government has as well utilized the performance measures to set clear, transparent targets to enhance public services in several areas. Thus, political primacy and answerability has officially increased as a result of the financial management reforms (Blöndal, 2003). Management The main aim of the results-oriented financial management reforms is the realization of enhanced fiscal management by public service managers. The reforms were geared at changing the philosophy of government management. Government operates in a more competitive environment, producing their goods and services in a contestable market. The Australian and British financial management reforms have introduced a number of tools to carry out more efficient and effective financial management. Among these tools, there are the accrual basis for budgeting and accounting, the possibility to borrow and the end-year flexibility. Moreover, the authorization of the resources on the outcome level gives management much more freedom to utilize these resources in the most efficient and effective way so as to attain these outcomes. It is clear that the reforms have brought changes in management behavior and more attention to competence and success (Department of the Prime Minister and Cabinet, 2003). The disadvantage is that the accrual component is frequently seen as useless by the line or programme managers. The merits of the output/outcome component of the reforms on internal management are not clear. The result information or the non-fiscal information is in most cases only provided because it is a must. In the obligation disappeared, most agencies would not provide this information in the current form (Department of the Prime Minister and Cabinet, 2003). Political decision-making process In both countries, a growing political interest for the results-oriented information has been observed. Nevertheless, there is minimal substantiation that the output and outcome information is vigorously and particularly employed in the political decision-making procedure. This is due to the poor quality of the results-oriented information (OECD and World Bank, 2003). Since the performance information is not audited (unlike the case in the financial statements), there is no assurance concerning the relevance, the appropriateness and the fair representation of the performance information. Therefore, in both countries, there is little evidence that the performance information is vigorously utilized in the political decision-making procedure (OECD and World Bank, 2003). Financial control Both Australia and the UK have thrived in merging financial control with a more results-oriented budget. The suite of financial statements offers a more inclusive image of financial activity than cash reporting alone. Accrual-based financial information and budgets give a picture of operations during the period concerned and the overall financial position. However, as cash-flow information remains important and necessary for sound fiscal control and to identify the treasury need for cash, Australia and the UK also supply cash-flow information to have a more complete overview. While the resources are appropriated for outputs or outcomes, financial control should be strong enough to be able to intervene when necessary. Therefore, a clear view on the cash information is necessary (OECD and World Bank, 2003). The way forward We have seen that the results-oriented financial management reforms have both positive and negative effects and hence needs to be readdressed. To mitigate the negative effects, the two countries should be proactive and implement the reforms in the most efficient and effective way. The introduction of new systems and documents ought to be taken as a learning process for both civil servants and politicians. The promotions policy should try to avoid any lack of understanding by politicians of the accrual-based account so as to prevent them from falling back on cash information. It should also make sure that there is broad involvement and support. Broad support for the reforms is needed so as to guarantee additional efficient and effective implementation. Thus, the reforms should not only be developed by the central actors, but line departments and agencies ought to be involved so as to create a large commitment to the reforms and minimize resistance (Guthrie, 1998). As seen from the two cases, the vital actor in charge of the monetary and budgetary strategy and the highest audit institution have an imperative responsibility to play regarding to the realization of financial management reforms. For that reason, it is advised to struggle for good collaboration and harmonization of the activities. A comprehensible timetable may be drawn up with detailed provisional results which ought to be attained. A superior monitoring structure is required so as to respect this timetable (HM Treasury, 2001). Conclusion In this paper, the Australian and British results-oriented financial management reforms were illustrated. Both countries have been very vigorous in modernizing their fiscal management moving towards a performance –oriented budget and by introducing accrual budgeting and accounting. The effects of such modernization on topics such as parliamentary control, accountability and management were discussed. The last section discussed the mitigation process that can be adopted to avoid the negative effects of the results-oriented financial management reforms. References: Australian National Audit Office, 2001. Performance Information in Portfolio Budget Statements, ANAO, Canberra. Blöndal, J. R. 2003. “Accrual Accounting and Budgeting: Key Issues and Recent Developments”, OECD Journal on Budgeting, 3(1): 43-59. Chan, M., Nizette M., La Rance L., Broughton C. and Russell D. 2002. “Australia”, OECD Journal on Budgeting, 1(4): 35-69. Department of the Parliamentary Library, 2002. The Commonwealth Budget: Process and Presentation, Canberra. Department of the Prime Minister and Cabinet, 2003. Requirements for Annual Reports for Departments: Executive Agencies and FMA Act Bodies. Department of the Prime Minister and Cabinet, Canberra. Ellis, K. and Mitchell, S. 2002. “Outcome-focused Management in the United Kingdom”, OECD Journal on Budgeting, 1(4): 111-128. Guthrie, J. 1998. Application of Accrual Accounting in the Australian Public Sector – Rhetoric or Reality? Blackwell Publishers Ltd, Oxford, United Kingdom. HM Treasury, 2001. Managing Resources: How the Resource Accounting and Budgeting Project was Managed, HM Treasury, London. HM Treasury, 2001. Better Management of Public Services: Resource Budgeting and the 2002 Spending Review, HM Treasury, London. HM Treasury, 2003. The Resource Accounting Manual 2002-2003: HM Treasury, London. http://www.apsc.gov.au/about/exppsreform8.htm OECD and World Bank, 2003. OECD/World Bank Budget Practices and Procedures Database. Accessed August 31, 2011 from http://oecd.dyndns.org/. Stewart J. 2007. The paradox of information: financial management reform and the costs of bureaucracy in the Australian Public Service. UNSW@ADFA, Canberra. Accessed August 31, 2011 from http://bus.unsw.adfa.edu.au/research/Public%20Policy%20Papers/StewartIRSPMFinMgt_Rev_.pdf Read More