Chapter 15 1

Chapter 15

Managing for Results

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Learning Objectives

Roles of accountants in the management of governmental and not-for-profit organizations

How program budgets overcome limitations of traditional object-classification budgets

The need for, and characteristics of, sound operational objectives

Risks of establishing explicit organizational objectives

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Learning objectives (cont’d)

Ways in which program budgets link expenditures to objectives

Advantages and disadvantages of program budgets

Importance of reporting measures of service efforts and accomplishments

Special problems in capital expenditures budgeting for governments and not-for-profits.

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Role of Accountants

They play multiple roles in entity’s management.There are 4 phases to the process: When social problems arise: area specialists

– Collect and analyze budgetary and financial information

– Compare potential costs and benefits– Accountants can make valuable

contribution to this phase.

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Role of Accountants (cont’d) When policy-makers select among the options

presented to them:-Accountants have less to contribute in this phase.

When programs are administered by appropriate agencies:

-Accountants actively involve in establishing plans, operating budgets, controlling costs, preparing financial and other operating reports.

When programs are audited: – Assessed by audit teams where accountants play a

vital role. – The teams also include statisticians, economists, and

other specialists.

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Limitations of Traditional Budgets Budget:

– is the most significant of financial documents– Determines amounts of resources to be received– Details the financial strategy of the organization

Limitation: Budget doesn’t provide information on the extent the expenditures will enable the organization to achieve its objectives.

Operational objectives:-Is at the heart of budgeting-Signifies specific sought-after results-Should be both quantifiable and measurable

NOTE: Please look at the proposed budget for Highland Hills Assistance League on pg. 634.

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Characteristics of Operational Objectives

Operational objectives: Are the basis for allocating resources, managing day-to-

day activities. Are not the means to achieve organization’s goals.

Instead, they represent the outcomes. Should be precise, doable and measurable. Generally includes multiple objectives. The central theme of recent management literature. This

suggests that organizations should be ‘mission’ driven rather than ‘rules’ driven.

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Adverse Consequences

Operational objectives:– May give rise to conflict– Risk of alienating organization’s

constituents– May result in dysfunctional behavior– Employees may target their efforts

toward improving what will be measured rather than what may be beneficial to the organization.

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Performance Budgets

Relate expenditures to operational objectives. Used instead of, or as a supplement to the

traditional object classification budgets. Program budgets:

– Common type of performance budgets– Allocate funds by program and not by objects– Ex. Funds appropriated for fire prevention

programs, health programs, for public safety programs etc.

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Performance Budgets (cont’d)

– Composed of activities directed toward a common goal.

– Generally carried out within a single organizational unit

– May also cut across departments. Zero-base budgeting (ZBB):

-one variant of program budgeting

-Requires explicit decisions and judgments

-Mandates that both current and proposed activities be subject to common review.

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Focus on Activities Expenditures are mostly classified based on

object and fund. They should also be broken down by

activities. Ex: Highland Hills Assistance League

maintains the following programs:– Employment skills, Housing rehabilitation, and Teen

substance abuse

Following are examples of activities in the employment skills programs: – Job-seeking skills, Computer training, Electronics training,

and Day care

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Review and Ranking Once requests for funding have been prepared,

they must be reviewed and ranked. Sometimes, individual units establish criteria on

how to rank the funding proposals. Some organizations establish uniform guidelines

for their units. Organizations give prioritize to activities that will

advance a particular phase of its mission. For instance, Highland Hills Assistance League

may give priority to activities that involve children.

NOTE: An example of Budget Ranking Schedule can be found on Pg. 644.

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Advantages of Program Budgeting

Directly relates expenditures to objectives Considers alternative means of achieving

the same objective Promotes analysis of behavior of costs Encourages Periodic review of programs

and activities to ensure that they are consistent with the organization’s objectives.

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Disadvantages of Program Budgeting

Organizational objectives may provoke conflict.

The specific rankings of activities may make some employees feel that they are less important.

It links expenditures with anticipated outcomes. Increasing budget will not necessarily lead to an increase in the outcome.

May require extra efforts for initial implementation.

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Disadvantages (cont’d)

May present decision makers with overwhelming amount of information.

Technical adjustments to computer programs and control systems may be very expensive.

It may not live up to the expectations of participants in the budgetary process.

Program officials’ rankings might be overridden by the ultimate decision makers due to which the officials may become cynical toward the entire budget process.

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Service Efforts and Accomplishments

GASB established the following as one of the main objectives of financial reporting: – “Financial reporting should provide information to

assist users in assessing the service efforts costs and accomplishments of the governmental entity.”

In order to achieve this objective, GASB has conducted research on service efforts and accomplishments (SEA) indicators.

In order to tie budgets to specific performance objectives: – an organization should periodically report to what

extent it has achieved those objectives.– should report results and audit those results.

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Performance Measures

Reasons for why governments should compile and incorporate performance measures into their management process:– Measuring and reporting upon performance

promotes higher-order accountability.– SEA reports stress the significance of achieving

objectives but traditional statements stress the importance of budgetary compliance.

– SEA measures are consistent with the purposes of financial reporting, nature of government and non-profit organizations.

– SEA reporting provides sound budgeting and administration.

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SEA Indicators Measures of efforts:

– resources applied to a service.

Measures of accomplishment: – include both outputs and outcomes

Measures that relate efforts to accomplishment: – include efficiency measures – Cost-outcome measures

GASB concept statements emphasize that these 3 types of data be supplemented with explanatory information that can help users to understand the measures.

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Limitations of SEA

SEA measures:– Are unlikely to indicate entity’s true accomplishments

apart from the stated objectives.– They don’t provide a measure to find out if the

objectives are really worth achieving. – Since accomplishments can not be described by a

single measure, SEA might have to provide several measures.

– SEA data do not take into account different operating conditions and therefore, might not provide sufficient information to enable meaningful comparisons.

– Comparisons over time within the same organization can be deceptive if the conditions change.

– SEA data can be easily under-or over-aggregated. Granof-5e

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Audits of SEA Reports

AICPA has separate standards for attesting to nonfinancial assertions.

Auditors:– could be required to assess the adequacy of the

information– verify if the data provided are reliable

– Evaluate whether they are fairly presented. This could require auditors to review the

entity’s internal control systems and test selected transactions.

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Capital Expenditures Both government and non-profits acquire capital assets. They are costly and hence have long-term impact on

operating costs and results. Capital assets provide benefits over more than a year

and hence capital acquisitions are better financed with debt rather than with operating revenues.

The amount of debt that can be issued is always limited by legal debt limitations.

A project that needs to be financed should compete for funds with other projects that will be financed from the same pool of resources.

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Capital Expenditures (cont’d)

Capital improvement program (CIP): – entity’s long-term schedule of capital acquisitions.– Commonly associated with infrastructure assets, such

as buildings, roads, and airports etc.

Capital budgeting and programming are carried in 2 stages: 1)individual projects are screened to determine if they

should be undertaken by conducting cost-benefit analysis.

2) projects are ranked.

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Capital Expenditures (cont’d)

CIP enables an organization to sharpen its focus on capital outlays.

Government and non-profit assets do not usually provide cash inflow but they still need service and maintenance.

But there is a risk of failing to account for operating and maintenance costs associated with the newly purchased assets.

Risk of overlooking maintenance costs can be minimized by incorporating an itemization of anticipated additional operating costs into the benefit-cost analysis.

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Benefit-Cost Analysis

Business Vs. Governments and Non-profits: For business, benefits are cash flows For governments and non-profits, benefits are

drawn from their own operational objectives. Benefit-cost analysis is used to enhance the

objectivity of decision making. By no means can it eliminate the role of

informed judgment.

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Benefit-Cost Analysis (cont’d)

Governments and non-profits undertake projects that extend the length, or enhance the quality, of human lives.

The benefits of available options are not always the same.

It is not easy to place a dollar value on human lives or happiness. Future earning capacity is an approach that is used in placing an economic value on human life.

Ex: cost of purchasing an additional ambulance vs. the value of human lives it might save.

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Summary Accountants play a vital role in all phases of the

management cycle. Although operational objectives ideally should represent

true ends, organizations usually express their objectives as outputs rather than outcomes due to practical difficulties.

Organizations face significant difficulties in establishing operational objectives.

Program budgeting ensures that all expenditures are justified in relation to the objectives.

Governments and non-profits must provide information about their service efforts and accomplishments.

One of the disadvantages of evaluating capital expenditures apart from operating expenditures is that the operating costs are usually overlooked.

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