Performance Measurement In The New Public Sector Accounting Essay

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Public sectors have long been criticised as being inefficient, non-productive, not-innovative and poor-performance. Such criticisms have given rise to the emergence of the New Public Management (hereafter NPM) as the new paradigm in public sector management (Osborne & Gaebler, 1992). This study concerns with performance measurement in the "new" public sector using the case of local governments in Indonesia.

The term "new" public sector was initially coined by Hood (1995) to refer to the public sectors being reformed based on NPM doctrines. Holloway, et al (1999) coined the word "new" public sector to refer to the public sector being reformed by adopting new management approaches such as reformed budgeting and costing systems, benchmarking and performance measurement. They use the term when reporting their study based on surveys and longitudinal case studies of NHS and public sectors in the UK (Holloway, et al 1999). Jackson & Lapsley (2003) also used the term "new public sectors" to refer to those being reformed by the ideas of NPM which focuses on results and measurement and in which accounting has a central role.

NPM has inspired public sector reforms in a number of countries in which the essence is to improve the performance of public services (OECD, 1993). Under NPM, development of performance measurement system (PMS) is highly regarded and widely adopted as a recipe for improving public sectors' low performance caused by bureaucratic government (Mwita, 2000). This, among others, has been evident by various performance measurement initiatives in a number of countries (OECD, 1993).

In the USA, for example, under the Government Performance and Results Act (GPRA) of 1993, all government agencies have been required to implement performance measurement systems and to submit annual performance report (Lindblad, 2006; Cavalluzzo & Ittner, 2004). GPRA in the US and other related initiatives in other countries are based on the assumption that mandated reporting of results-oriented, using strategic performance indicators can improve government efficiency and effectiveness by increasing accountability of public managers (Cavalluzzo & Ittner, 2004; Jones & McCaffery, 1997).

In Indonesia, such an initiative was started in 1999 through the promulgation of President's Instruction No. 7/1999. Based on the instruction, all government agencies, including local governments were required to report their performance annually. Local governments, more specifically, have been further enforced to implement PMS since the implementation of regional autonomy based on Law No. 22/1999 (which then replaced by Law No. 32/2004 on Local Governments) and Law No. 25/1999 (which then replaced by Law No. 33/2004 on Fiscal Balancing between Central and Local Governments). This has been further strengthened through the promulgation of Law No. 17/2003 (on State Finance) and Government Regulation No. 58/2005 (on Government Financial Management), obligating all local government agencies to implement performance-based budgeting and to produce annual performance report. Recently, efforts to improve the performance measurement systems have further been initiated by promulgating Government Regulation No. 8/2006 on financial and performance reporting of government agencies. More specifically, for assessing the successfulness of regional autonomy policy, Government Regulation No. 6/2008 (on the guidance for evaluation of local governmental services accomplishment) was issued.

This study is focused on East Java Province. This province is one of the Indonesian provinces with high population density. According to 2005 census, its population was 36.2 million, which is greater than Malaysia which was inhabited by 23 million people or Australia which was inhabited by 21 million people in 2005. Such a big population size of the people are spread out in the area of 41,000 km2, consisting of 38 districts (regencies/municipalities) and 650 sub-districts (kecamatan). Even though its fertility rate in general has been relatively low (0.77%), in average its population growth rate has been still considerably high. Having limited economic resources, this province is still facing main problems of population and people wealth (PSKK-UGM, 2007).

Problem Statement

In line with the PM initiative, the Indonesian central government has published manual on preparing government performance report (LAN, 2003). In addition to the implementation of the Law on State Finance, local governments have also been equipped with detailed guidance on preparing performance-based budgeting issued by Ministry of Home Affairs (Regulation No. 13/2006). However, at the early stage of the reform and due to lack of competent staff (Harun, 2007) local governments in Indonesia were still far from achieving the essence of performance-based budgeting and performance measurement (hereafter PM). The Minister for Government Officials Empowerment asserted this in 2002 saying that "…. There has been wrong perception among government officials that accountability was perceived only as an obligation to produce financial reports. There has been no evaluation on whether the accomplishment of government programs and activities have resulted in improving peoples' wealth or just for disbursing money within budget for the benefits of government's institution and officials" (Kompas Cyber Media, 10 September 2002). This suggests a significant gap between local governments' preference towards rule compliance matters as exerted by the Central government and needs for managerial use. While the value-for-money (VFM) concept (using efficiency, economy, and effectiveness indicators) has been suggested [1] , the extent to which VFM guides public managers is not known. Whether the practices and use of PM system has led to better results, as expected, is therefore, still questionable.

When addressing the issue of PM in governmental agencies, Ittner & Larcker (1998, p. 233) suggested that future research in this area should address the question of whether new performance measurement systems will actually improve governmental performance. More importantly, future research also needs to address the most fundamental question, i.e. whether private sector notions of performance measurement and accountability are applicable in the public sector.

Studies on the practices and usefulness of PM in public sectors which were mostly conducted in developed countries raised different issues and resulted in different models of PM utilisation (see, for example, Jones & McCaffery, 1997; Wang, 2002; de Lancer Julnes & Holzer, 2002; Cavaluzzo & Ittner, 2004). Clearly, the findings have been inconclusive. To address the complexities of public sectors, literature advocates the use of multidimensional performance measures (Brignal & Modell, 2000; Kloot & Martin, 2000; McAdam, Hazlett & Casey 2005). Hoque (2008, p. 469), asserted that not much is known about "why" and "how" government entities have turned to implementing "modern" performance measures such as balanced scorecard. In attempting to fill the gap, Hoque (2008) conducted a case study based on archival documents. However, the study provides limited insight into how public sector managers perceived the relevance and usefulness of performance measurement data.

It is still questionable whether NPM could have real impact on improving the performance of governments in developing countries. One of the main obstacles is the lack of antecedents for contract management. Public sector reforms in developing countries are also constrained by the characteristics of the existing administration. For instance, NPM is difficult to implement in developing countries because of the prevalent problems of mismanagement, incompetent civil servants, and lack of accounting expertise (Mohamad, 2004, p. 81). Mimba, Helden & Tilemma (2007) contend that there are four features of Public sector in developing countries, i.e. (1) a low institutional capacity; (2) a limited involvement of stakeholders; (3) a high level of corruption; and (4) a high level of informality. These characteristics have been argued by Mimba, (2007) might cause disequilibrium between the demand for and supply of performance information. In the case of accounting and budgeting reform in Indonesian local government, those characteristics were confirmed by Djamhuri (2009) as the impediments for the institutional process of accounting and budgeting innovation. Budäus & Buchholtz (1996) believed that country specific factors and the concepts of administrative reform specific to its respective communities will affect the practices and the use of PM. This could result in different model of PM utilisation and implementation.

Objectives of the Study

The objectives of this study are:

To examine current practices of performance measurement in local governments.

To identify factors affecting PM utilisation that could explain the case of local governments in Indonesian context.

To examine the perceived impacts of PM utilisation on accountability of local government.

Research Questions

Based on the above objectives, the research questions going to be answered include the following:

What are the current practices of performance measurement in local governments?

What factors do affect the utilisation of PM in local governments?

Does the utilisation of PM enhance accountability?

Contribution of the Study

This study draws upon management accounting in public sectors and current literatures on public sector reform which is one of the main concerns of public sector accounting. The main reason for exploring this area is that Indonesian local governments, as autonomous entities, have recently been granted with much greater budget than ever before and mandated to improve public services provision and accountability. As such, measuring performance would be the central issue in local government management.

Considering that the debates on public sector PM will be likely to go on (de Lancer Julnes, 2006), it is imperative to conduct a study to know the situation at hand and gain familiarity with and understanding of the phenomena in the context of local governments. The notion of performance measurement brought by the "new public sectors" from the cases of developed countries might not be compatible with those of developing countries. As such, this study will contribute to giving the perspective of PM implementation in public sectors in developing countries, especially Indonesia.

A more in-depth analysis is necessary as "… PM do not tell us the determinants of the outcome, and so do not address questions of how and why" (de Lancer Julnes, 2006, p. 231). While previous studies have shown mixed evidence and resulted in different models (Wang, 2002; de Lancer Julnes & Holzer, 2002; Cavalluzzo & Ittner, 2004), this study expounds a model of PM utilisation in local governments as well as exploring environmental settings, uniqueness, country specific factors and administrative reforms in relation to the implementation of PMS in Indonesia. Findings on factors affecting the implementation and usefulness of PMS revealed by this study contribute to enriching literature, particularly with regard to public sector accounting in developing countries. The policy implications drawn from the findings are also expected to be of government interest for refining the implementation of results-based management (RBM).

This study finds that while government regulations have successfully led local government agencies to adopt PM, the implementation of PM was driven mainly by goal orientation and management commitment to utilizing PM which have been argued to be the essential elements of results-based management. The effects of regulatory factors, political and technical supports on the implementation of PM are mediated by goal orientation and management commitment.

This suggests that to achieve results oriented management, managers must be given sufficient decision making authority and to be supported by competent staff, reliable data, and effective information systems capable of producing reliable performance information within and across agencies. Decision making authority and parliament support also appear to be the crucial factors for strengthening managers' commitment to implement PM. Utilization of PM has been perceived to enhance accountability.

The practical implication of these findings is that, in order to successfully implement PM, there should be attempts to encourage management to be "goal oriented" as well as attempts to increase public managers' commitment to utilising PM, e.g. by providing local government officials with sound result-oriented reward and punishment. Training in PM is definitely needed by local government officials.

Organisation of the Dissertation

The reminder of this dissertation is organised as follows. Chapter 2 discusses the international public sector reform and the search for performance measurement systems. Chapter 3 presents public sector reform and the development of performance measurement systems in Indonesia. Chapter 4 presents the theoretical frameworks and hypotheses developed in this study. Research methodology adopted in this study is presented in Chapter 5. Chapter 6 presents the results from statistical data analysis, and the discussion of findings from hypotheses testing. Further discussion of the results of qualitative analysis is presented in Chapter 7. Finally, Chapter 8 presents the overall conclusion of this study, its limitations and suggestions for future research.