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2 Rue André Pascal
75775 Paris Cedex 16
France
mailto:sigmaweb@oecd.org
Tel: +33 (0) 1 45 24 82 00
Fax: +33 (0) 1 45 24 13...
2
Background information
The concept of internal control was developed in order to describe the process of establishing an...
3
1. Introduction
The objective of this conference paper is to explain the notion of managerial accountability and to
intr...
4
The second point can most easily be summarised as being a functioning and fit-for-purpose internal
control system8
.
Fin...
5
The following are examples of the control questions in this area, to self-assess the system being used:
- Are all the ta...
6
information. Deadlines are generally prescribed by the law, and re-designing the process can shorten
elements of either ...
7
requires a good system for cascading objectives. The formulation of general objectives has to be
followed by the setting...
8
3. Maturity levels of managerial accountability
As mentioned previously, the notion of managerial accountability present...
9
Points for discussion
1. Different levels of maturity – where do we stand?
2. Step by step to maturity – does managerial...
10
elements of social or organisational culture. Nevertheless, awareness of the indirect factors should
complement the dev...
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Discussion paper, 4th Regional PIFC Conference for EU Enlargement Countries, Montenegro, 29-30 September 2016

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Discussion paper for the 4th Regional public internal financial control conference for EU Enlargement countries, organised by SIGMA and co-hosted by the Ministry of Finance of Montenegro, that took place in Becici, Montenegro on 29-30 September 2016.

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Discussion paper, 4th Regional PIFC Conference for EU Enlargement Countries, Montenegro, 29-30 September 2016

  1. 1. 2 Rue André Pascal 75775 Paris Cedex 16 France mailto:sigmaweb@oecd.org Tel: +33 (0) 1 45 24 82 00 Fax: +33 (0) 1 45 24 13 05 www.sigmaweb.org This document has been produced with the financial assistance of the European Union. It should not be reported as representing the official views of the EU, the OECD or its member countries, or of beneficiaries participating in the SIGMA Programme. The opinions expressed and arguments employed are those of the authors. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. Managerial Accountability in Public Administration practical aspects of the concept and its implementation Discussion paper 4th Regional Conference on Public Internal Financial Control for EU Enlargement Countries 29-30 September, Bečići, Montenegro
  2. 2. 2 Background information The concept of internal control was developed in order to describe the process of establishing an organisation – itself defined as a combination of rules and roles – that is able to deliver expected results. The definition of an ideal internal control system presents four objectives that it should ensure the organisation can meet: • executing orderly, ethical, economical, efficient and effective operations; • fulfilling accountability obligations; • complying with applicable laws and regulations; • safeguarding resources against loss, misuse and damage1 . In order to ascertain whether they meet these objectives, organisations generally use international benchmarks. The most important of these are the COSO standards2 , which are the most universal, and the INTOSAI guidelines3 , which, although intended for the public sector, are presented from the point of view of an external auditor. The concept of public internal control (PIC) corresponds to the EU concept of public internal financial control (PIFC) included in the provisions of Chapter 32 of the acquis communautaire. This approach, with accountability being the obligation of public sector managers to justify their actions, can also be found in the Principles of Public Internal Control provided by the European Commission4 , with the definition of accountability being given as follows: Accountability is the obligation to account and answer for the execution of responsibilities to those who entrusted those responsibilities (obligations to perform). These responsibilities are delineated by the actor’s authority (empowerment) – the right to act. Accountability involves provision of information on, as well as explanation and justification of actions, activities and choices5 . PIC places emphasis on two aspects in particular. The first is that management accountability should be decentralised. Decentralisation implies the cascading of objectives through an organisation, with responsibilities being distributed to the widest degree possible. The second is the symmetry that is necessary for managerial accountability. The allocation of responsibility must be matched by sufficient autonomy (authority and resources). Managers are accountable for their actions to their superiors in the organisation and are obliged to report to those superiors on how well their responsibilities have been carried out. The Principles of Public Administration6 have been developed by OECD/SIGMA in close co-operation with the European Commission to define detailed requirements for a well-functioning public administration in six core areas: the strategic framework for public administration reform; policy development and co-ordination; public service and human resource management; accountability; service delivery; public financial management. 1 Guidelines for Internal Control Standards for the Public Sector, The International Organisation of Supreme Audit Institutions (INTOSAI) http://www.intosai.org/. 2 Committee of Sponsoring Organizations of the Treadway Commission http://www.coso.org/IC.htm 3 Guidelines for Internal Control Standards for the Public Sector, INTOSAI. 4 Principles of Public Internal Control, Position Paper No. 1, Public Internal Control. An EU approach. Ref. 2015-1. 5 Principles of Public Internal Control, Position Paper No. 1, Public Internal Control. An EU approach. Ref. 2015-1, p. 7. 6 SIGMA (2014), The Principles of Public Administration, OECD Publishing, Paris.
  3. 3. 3 1. Introduction The objective of this conference paper is to explain the notion of managerial accountability and to introduce a discussion about the practical aspects of its implementation. The questions will be used to trigger discussion during the 4th Regional Conference on Public Internal Financial Control for EU Enlargement Countries to be held on 29-30 September 2016 in Montenegro. The intention is that the answers to the questions, together with the conclusions of the discussion, will allow the formulation of practical recommendations for developing and enhancing managerial accountability in EU Enlargement countries. 2. Managerial accountability for practitioners Managerial accountability is not a very well-recognised term among public sector managers. A useful starting point for understanding the issue of managerial accountability is the idea of strategic space7 . This is a space where a public sector manager can also act as a creator, and not only as an executor. Some managers may have almost no strategic space, being obliged to follow detailed regulations, standards and procedures with little or no ability to influence them; whereas managers with broader strategic space will have greater autonomy in making decisions. In this paper, we will refer to administrative accountability where there is no strategic space; when autonomy increases we will refer to managerial accountability. Autonomy in decision making represents an important element of managerial accountability. In practice, public sector managers are faced with a mixture of administrative and managerial accountability. However, the legal requirements, regulations, procedures and standards to be followed are examined by different control/audit services, and therefore they are usually treated as a priority. If this is a fair description of the management environment in an organisation then it may be that only administrative accountability exists. Performance issues become more important once managers are judged primarily on their achievement of policy objectives. A system of managerial accountability must include both regulatory and performance aspects. If its focus is purely on legal requirements, performance issues can be underestimated. If the opposite is true, total concentration on achieving objectives may lead to unintended legal distortions, and the risk of misuse of public funds is substantial. From the public sector manager’s perspective – especially at the higher levels of management – it is important that the regulatory framework sets up transparent procedures for the management of public funds and that policy objectives are relevant and clearly stated. To summarise, the ideal conditions in which to develop a good managerial accountability system contain the following: 1. Regulations for the public sector which establish a framework for good public administration. 2. A framework clearly defining the responsibilities of operational managers and the delegation of decision-making authority to them. 3. Clearly stated policy objectives: not just for the organisation, but also for operational managers who have a reasonable level of autonomy. The first point covers (among other items) the legal bases for the accounting system, public procurement, delegation of authority, the frameworks for the planning and resource allocation systems, together with those for monitoring and reporting. 7 The idea of strategic space was developed by E. Ongaro in the discussion paper presented at the conference Public Internal Control Systems in the EU Member States in February 2012. (http://ec.europa.eu/budget/events/pic2012_doc08.pdf )
  4. 4. 4 The second point can most easily be summarised as being a functioning and fit-for-purpose internal control system8 . Finally, concerning the third point, public sector organisations often have high-level policy objectives but clearly-stated objectives at the level of operational managers are much rarer. However, policy objectives play a substantial role in managerial accountability, so these objectives need to be cascaded down to the lower levels of organisations. The formulation of operational objectives should certainly include input from the responsible managers, and it is good practice for these operational managers to participate in the process of translating general objectives into objectives for units within the organisation. Senior officials can approve these disaggregated objectives. Accountability is the obligation of public sector managers to justify their actions. The Principles of Public Internal Control provided by the European Commission also define accountability9 . However, the Principles emphasise the essential relationships between accountability and responsibility and authority. There is no responsibility without authority and no responsibility without accountability. Delegating responsibility still leaves you accountable, which is especially important at the highest management level (minister, secretary or undersecretary of state). No responsibility should be assigned or accepted without the necessary resources to deliver, which favours the assignment of an appropriate budget to the structure led by the manager. In this context, we propose to discuss the practical aspects of managerial accountability within the framework of: 1. Responsibility 2. Authority 3. Autonomy (strategic space) 2.1. Responsibility To have tasks and responsibilities properly distributed inside the organisation is very important when talking about internal control in general, and managerial accountability in particular. There are three areas worth examining during the process of checking if this is done well: the division of tasks within the organisation, the reporting system and the delegation framework10 . The first area concerns clear and astute division of all tasks within the organisation. This is usually done through a document setting out the internal organisation and the roles of the different organisational units. The importance of the internal division of tasks forming a clear scope of responsibility is particularly emphasised by the COSO model, which recommends that it should include:  The association of the list of tasks for an operational unit with the general list of tasks for an entity, which is important in order to demonstrate the connections between the operational level and the entity’s mission.  The identification of connections between the tasks of individual internal units, thus enhancing the ability for units to co-operate.  The identification of outputs for tasks at every level of the organisation, thus allowing the effectiveness and efficiency of operations to be measured (and reported) and resources to be assigned rationally. 8 See Background information box. 9 See Background information box. 10 All of them can be found in the Standard 3 of COSO Internal Control – Integrated Framework Principles (2013) which states: Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives.
  5. 5. 5 The following are examples of the control questions in this area, to self-assess the system being used: - Are all the tasks distributed? - Does everyone know what their tasks and responsibilities are? - Are the tasks and responsibilities allocated to the appropriate levels of the organisation? - Do the workload and resources fit? The second area concerns the reporting system. The general assumption is that this covers both financial and performance aspects. It allows the identification of any deviations from the original plan during the reporting period. Reporting lines provide information to the management. The actual figures can be confronted with the planned values. The control questions in this area are: - Are the reporting lines established for all tasks? - Are the reports delivered on a timely basis, allowing a timely response to emerging risks? - Are the reports used for daily management? The third area concerns the delegation framework. It refers to both responsibility and authority. It is an important element of the internal control system. The control questions in this area are: - Are all tasks and responsibilities delegated to the lowest competent level? - Is the delegation of authority clear? - Is the delegation of authority sufficiently formalised to allow all staff to follow it? - Are top managers relieved of all duties which can be delegated to mid-managers or below? - Can the top managers concentrate on strategic tasks? Points for discussion 1. Clear definition of responsibility – problems and good practices. 2. Reporting system – administrative burden versus flexible tool of management. 3. Delegation of tasks and responsibilities – examples. 2.2. Authority Responsibility has to be followed by the corresponding authority. This is achieved by the delegation of the decision-making power and by allocating resources (including budget) so that individual managers have the right to decide (or at least influence) how to execute the tasks for which they are responsible. Alignment of the budget and the management structure results in better identification or ownership of tasks, and clearly marks the connection between the level of objectives fulfilled and the execution of the budget. If operations go beyond the scope of the duties described in the internal regulation document, it is important that the delegation of authority is based on a clear legal basis and documented in a way that allows identification of the responsible officer. Generally, the alignment of the budget and objectives can influence the managers’ behaviour as it stimulates interest in the optimisation of public services – both the quality and the costs. This can be linked to the concept of the ‘added value’ of public services, defined as the difference between the actual level of public services and the legal requirements for them. The concept of ‘added value’ assumes that public managers have the autonomy to improve the quality of public services within the allocated funds. Their efforts to improve efficiency make it possible to deliver better services than those required by law. The simplest example here is the case of promptness in answering public claims or requests for
  6. 6. 6 information. Deadlines are generally prescribed by the law, and re-designing the process can shorten elements of either process or input, reducing bottlenecks. The development of managerial accountability is linked to the level of development of the budget system. The possibilities for developing managerial accountability in the input-oriented budget system are limited. Under these circumstances, the main focus of public sector managers is to ensure that the budget execution is in line with the planned budget funds and that the operations are conducted in accordance with laws and regulations. This does not mean that there are no business objectives in place in input-oriented budget systems, but that the planning of operations is separated from budget planning and budget preparation processes, i.e. the link between objectives and budgetary funds needed for their implementation is missing, both at the planning and the execution stage. Unlike the input-oriented budget system, a result-oriented budget system puts a different set of requirements before the management in the public sector, which is the achievement of the set objectives and the expected results for the invested budget funds. This approach creates prerequisites for the development of comprehensive managerial accountability, as, in addition to the legality and regularity-related requirements, it requires economy, efficiency and effectiveness in the use of budget funds. To sum up, proper authorisation at the budgetary level can drive improvement in public administration. A result-oriented budgetary system can enhance the development of managerial accountability. Points for discussion: 1. Budgeting as a tool of delegation of the decision-making authority – alignment of budget and responsibilities. 2. Participation of operational managers in financial planning. 3. Participation of operational managers in the decision-making process. 4. Delegation of authority – advantages and disadvantages. 2.3. Autonomy (strategic space) As discussed previously, managerial accountability assumes that some level of autonomy for operational managers exists in the process of achieving objectives and delivering tasks and services. More autonomy implies responsibility for results. As well as the necessity of properly-established responsibility and frameworks for the delegation of authority, there is the issue of the clarity of the policy objectives. If targets are unclear or unknown there is no basis for being accountable for results. Each of the definitions referred to underlines the fact that the final purpose of the concept of managerial accountability and public internal control is to pursue objectives. Without pursuing relevant objectives that address actual challenges in the policy area, public resources risk being unwisely used. In this context, the quality of the process of formulating objectives is fundamental to a sound framework for managerial accountability. It is very important to open this process to participation, i.e. to allow operational managers to shape decisions about the expected levels of performance, while relevant stakeholders can take part or scrutinise the process. When objectives are set without any participation by operational managers and without transparency, the risk of underperformance is substantial, as managers will not identify with targets and will not develop ownership of them. Even where objectives are not negotiable, discussions with managers on resources are needed. A feedback mechanism should also be provided during the execution stage. Another aspect to take into account is the clarity of the objectives. Public sector managers can face two risks here. The first is related to an inappropriate level of aggregation, i.e. objectives are set on a general level while managers need objectives to be adjusted to their level of operations. Resolving this problem
  7. 7. 7 requires a good system for cascading objectives. The formulation of general objectives has to be followed by the setting of objectives for operational levels of the organisation. The second risk is the precision of the definition of an objective. It is important to ensure the objective is understood in the same way by all parties. This can be solved using various means: planning systems, formal appraisal systems based on indicators, or contracts signed with the managers11 . In all cases, measurable variables should be defined and performance levels stated. As systems measuring performance develop, the number of objectives adopted tends to increase. If there are too many objectives, the management process becomes more complicated. It also means that prioritisation is transferred to operational managers. This can increase the risk of misunderstanding, affecting performance outcomes12 . Another possible problem relates to the managerial focus on the process of delivering public services. When targets are already formulated, the attention of managers focuses on the objective – losing the broader context of public service. Managers think about products, not necessarily about the result of delivering public services. This risk can also be managed. In this context, a set of objectives is better than a single target, and objectives should be changed from time to time so that the complexity of activities can be monitored (the concept of living management). Public scrutiny can also have a positive effect here. The next element concerning the process of setting objectives is the need to go beyond the purely financial aspects in the planning system. Two aspects are worth mentioning. The first involves connecting the budget with targets and other, more detailed levels of planning. This connectivity is usually managed with the performance budgeting tools, i.e. budgetary plans stating the objectives for the expenditures. The second aspect involves plans being established for the units within the organisation. This is in line with the acquisition of authority corresponding to responsibility, as outlined in the previous section. Finally, it is important that long-term objectives are taken into account when short-term objectives are defined. This means that there is a strategic planning system in place and that the reviews of the achievement of strategic priorities are used as the basis for short-term adjustments. The interlinkage between long and short-term planning should be visible not only at the level of objectives but also at the budgetary level. Awareness of strategic priorities across the organisation is therefore crucial to the annual planning process. To conclude, objectives are the cornerstone of managerial accountability. Plans or other means of formally stating objectives that identify measurable, variable and expected performance levels are a very good communication tool between top management and operational managers. Plans should also specify the resources needed for reaching objectives, and take into account the strategic priorities. Such an approach ensures the participation of operational managers in the process of setting objectives. Points for discussion 1. Different levels of autonomy – from administrative to managerial accountability. 2. The process of cascading objectives to lower levels of the organisation – good practices. 3. How to measure performance – good and bad practices. 11 An interesting example of this type of contracting can be found in the paper by Jostein Askim, Tom Christensen and Per Lægreid: Performance management and accountability of welfare state agencies. The cases of Norwegian hospital, welfare and immigration administration. Stein Rokkan Centre for Social Studies, Working paper 8/2014. 12 When contracting began in 2008, the Norwegian Health Enterprise had to handle 35 objectives. After four years of developing the system, the number of objectives increased to 167. Jostein Askim, Tom Christensen, Per Lægreid Performance…, as above.
  8. 8. 8 3. Maturity levels of managerial accountability As mentioned previously, the notion of managerial accountability presented in this discussion paper is based on three initial requirements: (1) regulations for the public sector which establish a framework for good public administration, (2) a framework clearly defining the responsibilities of operational managers and the delegation of decision-making authority to them, and (3) clearly-stated policy objectives, not just for the organisation, but also for operational managers who have a recognised and reasonable level of autonomy. This will determine the environment or the “habitat” in which managers have to deliver results. They will be held accountable for the choices and decisions they made in order to achieve them. Section 2 describes the three practical elements (responsibility, authority and autonomy) that need to be clearly defined to provide for a healthy environment for managerial accountability. The scale of these requirements depends on how much emphasis is placed on performance issues. The general assumption is that performance aspects become more important over time. Therefore, the growing importance of performance issues in the managerial accountability framework is the basis for determining three levels of maturity:  Basic – The Principles of Public Administration13 are mostly applied. Basic internal control mechanisms are present. Objectives are stated at a very general level.  Developed – The Principles of Public Administration are applied. The internal control system is evaluated by audit services according to internationally-recognised standards. There are regulations for performance, determining minimum standards for public services. Public sector managers can influence the legal framework in their area of responsibility. Usually, public funds provision is related to performance targets (performance budgeting).  Advanced – The Principles of Public Administration are applied. The internal control system is evaluated by audit services according to internationally-recognised standards. Public sector managers maximise ‘value added’ of public services, i.e. the difference between the actual level of public services and the legal requirements. The performance targets and budgets are strictly related at the level of internal units within institutions, which means that managers have a specified budget for the execution of the targets. As delegation of responsibility and authority is in place, managers can actively seek improvements in regulation concerning their area of responsibility and advise other managers on making improvements in other areas. Some incentives for performance records are present. The three levels of managerial accountability mentioned above show how the transition from an administrative to a managerial system of management could be made in the public sector. The main benefit of that transition is a more decentralised system of public finance with a citizen-centered orientation. Another benefit is that top management has more time to deal with policy and strategy instead of signing financial documents, because the delegation of responsibility and authority is in place. The concept of ‘value added’ assumes that public managers have the autonomy to improve the quality of public services within the funds available to them. Their efforts towards greater efficiency mean that it is possible to deliver services better than those required by law. Moving from the administrative to the managerial system of management requires not only a certain number of regulations, but also changes in the organisational culture or in social attitudes which are usually very gradual. This means that regulatory efforts should always be complemented by training and soft law (standards etc.), as well as incentives for political leadership to work towards better management in their structures. 13 See Background information box.
  9. 9. 9 Points for discussion 1. Different levels of maturity – where do we stand? 2. Step by step to maturity – does managerial accountability lead or follow? 4. Factors enhancing managerial accountability Managerial accountability also depends on ‘soft’ factors. In other words, some elements of the social framework, the administrative tradition (macro level) or the organisational culture (micro level) can enhance managerial accountability or may form a serious obstacle to progress. The most general framework for developing managerial accountability is the level of social capital within the society. Social capital14 is the value (in economic terms) of social connections and networks. The more people trust and support each other, the higher the value of social capital. This is a key factor for delegation, collaboration and information sharing. The delegation of competences is more likely in an environment with higher social capital. The excessive-control approach will be applied in an environment where people do not trust each other. It does not mean that delegation of authority and responsibility cannot occur, but that the transaction costs of a complex control system may be a serious obstacle. At the micro level, elements of organisational culture can also enhance the development of managerial accountability. It is worth considering their development in parallel to the development of the three initial requirements:  Symmetric planning and reporting lines – in an environment where planning and reporting lines are symmetric, i.e. planning information follows the same path as reporting information, managerial accountability is based on the quality of the information. In particular, where the planning and reporting systems go deeper into the organisation (units, project teams), the definition of responsibilities is clearer and ownership is stronger.  Medium and long-term planning – the longer the planning perspective that is applied in the organisation, the more stable the path for setting objectives will be. This also promotes thinking about results in the longer term – especially when result-based indicators for measuring achievement of objectives or results are used for the longer perspective. It promotes thinking from the perspective of results rather than products.  Analytical competences – while administrative management systems primarily require legal knowledge, systems with more advanced managerial accountability features require more analytical competences. The construction of indexes, analysing data, forecasting – they form a demand for analytical competences in the public sector. This can especially be seen in large organisations.  Review culture – reports on the execution of objectives are the subject of regular review meetings. Top management participates in these reviews. Managers responsible for given targets present deviations from the plan and remedial or adjustment measures. Meetings are documented and conclusions followed-up.  Incentives for achieving objectives – some systems of public remuneration make it possible to pay for the activity outcome. This promotes a result-oriented environment (administration) where regularity checks have traditionally been the priority. Other (non-financial) forms of reward are not only possible but strongly recommended. Additional points can be added to this list, both from the macro and micro levels. There are two general conclusions about the environment for managerial accountability. The first is that the development of managerial accountability requires investment in the environment, as the optimal situation is balanced development. The second conclusion is that change in the direct factors is time-consuming, as there are 14 To read more about the social capital consult: Scrivens, K. and Smith, C. (2013), "Four Interpretations of Social Capital: An Agenda for Measurement", OECD Statistics Working Papers, No. 2013/06, OECD Publishing, Paris. DOI: http://dx.doi.org/10.1787/5jzbcx010wmt-en
  10. 10. 10 elements of social or organisational culture. Nevertheless, awareness of the indirect factors should complement the development of managerial accountability. Points for discussion 1. What other soft factors can enhance the development of managerial accountability? 2. How can we change the culture of a public organisation? Acknowledgments: The SIGMA public finance management team would like to express its gratitude to Adam Niedzielski and DG Budget PIC Task Force colleagues who contributed greatly to this discussion paper.

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