Financial Management and Accounting in the Public Sector

Gary Bandy

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317659228
• Edition: 2
• Topic: Business
• Subtopic: Business generale
• Index: Business

The impact of the global financial crisis on government funds has been significant, with squeezed budgets having to satisfy ever-increasing demands for public services. Managers working in the public sector are confronted daily with targets and demands that are often set in confusing accounting and financial language. In Financial Management and Accounting in the Public Sector, Gary Bandy employs a clear and concise narrative to introduce the core concepts of accounting and financial management in the public sector and how to deliver services that represent value for money.

This second edition has been revised and updated throughout, offering:

• an increased focus on post-crisis austerity

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• more international examples of public financial management

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• greater coverage of governance, accountability and risk management

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With a glossary of terms to help managers understand and be understood by accountants, as well as learning objectives, case studies and discussion questions, this practical textbook will help students of public management and administration to understand the financial and accounting aspects of managing public services.

Chapter 1 The context of managing public money

DOI: 10.4324/9781315766034-1

Learning Objectives

• To be aware of the differences between the private and public sectors.
• To know something of the history of public financial management, including the financial management aspects of the new public management paradigm.
• To introduce the concept of public value.
• To understand the scope of public financial management and be familiar with the basic concepts of public sector accounting.

Key Points

• The public sector is a large proportion of national economies (although it varies from less than 10 per cent in some countries to more than 40 per cent in others).
• The management of public money is different from financial management in the private sector.
• Public expectations about the proper use of public money are very high.
• Financial management is a critical skill for public managers and it is as much an art as a science.

Key Terms

• Accrual accounting – the system of accounting where transactions are recognized in the accounting period where the transaction occurred, regardless of when the relevant payments or receipts are made or received.
• Capital expenditure – expenditure on the purchase, construction, development or enhancement of assets (such as buildings, roads, bridges and computer systems) that will be of long-term benefit to the organization.
• Merit goods – commodities (goods and services) that are valued by the public but excludable (such as education) and which governments decide to provide because the market would under-provide them.
• Public goods – commodities (goods and services) which markets would fail to provide and which are non-rivalrous (the use by one person does not restrict the use by others) and non-excludable.
• Public value theory – the theory put forward by Mark Moore (1995) that public managers seek to create public value just as managers in the private sector seek to create shareholder value.
• Revenue/operating expenditure – expenditure that is not capital expenditure.

High quality financial management is key to ensuring that the Government meets its spending plans and spends taxpayers' money as efficiently and effectively as possible within them.

(HM Treasury, 2013: 5)

Financial performance is […] the means to an end rather than an end itself.

(Moore, 2003: 15)

Introduction

This book is aimed at public managers and students of public administration and it concerns itself with helping them_

• to understand the principles of how public bodies (from small charities to national governments) manage their finances;
• to pick up skills and knowledge to manage public money;
• to develop their thinking about public financial management in the future.

This book is not an accounting textbook. There are numbers in it but they have been kept to a minimum in order to focus on the financial management principles (and not scare off readers who do not like working with numbers). It is more of a handbook or manual describing how public money is managed than a critical text seeking to analyse which aspects of public financial management are better or more successful. There are suggestions of books and articles which provide greater analysis of public financial management, particularly at the government level, in the Further Reading section at the end of each chapter.

Structure of this book

The order of the chapters in the book follows the sequence of planning, doing and reporting as it applies to public financial management. Whilst the chapters follow a logical flow they stand alone so that a reader can dip in and out of chapters depending on their interests.

This opening chapter sets the management of public money in context and identifies some key differences between the private and public sectors. It is followed by a chapter on budgets and budgeting since the first thing a public body requires is a plan for how it will gather and use its resources to achieve its aims. The chapter on budgeting is the longest in the book reflecting the fact that politicians and the public are more interested in budget decisions that influence the upcoming year (or longer) than the day-to-day operational decisions taken in the budget implementation phase. This extra attention on budgeting is one of the key differences between the public and private sectors and there is a lot of material covered in that chapter.

Chapter 3 is about taxation and other sources of income since money needs to be obtained before it can be spent. The next three chapters are about three different aspects of spending public money: controlling income and expenditure; making decisions about projects and investments; and working with partners and contractors.

Having expended public money it must be accounted for. Chapter 7 is about measuring performance and assessing value for money. Chapter 8 is about accountability and financial reporting and Chapter 9 covers internal and external audit. The final chapter pulls the threads together and sets out ten principles for a public manager to bear in mind when managing public money.

There are different terms used to describe the organizations that are the focus of this book, including public sector organizations, public bodies and non-profits. A term that is becoming more common in academic literature and in accounting standards is ‘public benefit entities’ (PBEs). Laughlin (2008: 251) cites Simpkins's summary of the features of PBEs:

• their objective is to provide goods and services to various recipients or to develop or implement policy on behalf of governments and not to make a profit;
• they are always characterized by the absence of defined ownership interests that can be sold, transferred or redeemed;
• they typically have a wide group of stakeholders to consider (including the public at large);
• their revenues are generally derived from taxes or other similar contributions obtained through the exercise of coercive powers;
• and their capital assets are typically acquired and held to deliver services without the intention of earning a return to them.

This book will use the term PBE when referring to the generic organizations that public managers work in or with. This is because it captures organizations such as nationalized industries which are managed on a commercial basis but differ from other private sector, for-profit organizations because they are owned by a government, and voluntary and charitable organizations, as well as the government ministries, hospitals, schools, police forces, local governments, etc. that are commonly thought of as the public sector.

This book also uses the term ‘public manager’ to refer to those who are involved in the executive management of PBEs. As well as a PBE's chief executive and line managers the term includes the members of the governing body whether they are elected politicians, appointees or volunteers and private sector managers if they produce work primarily for government. The term is not used here quite as broadly as Moore (1995: 2–3) uses it: ‘supervising agents, judges, lobbyists and interest group leaders’ (Rhodes and Wanna, 2007: 408) are excluded here because they are not in a position to manage a PBE's finances although they may have influence on the public managers who do.

The remainder of this opening chapter is in four parts. As this is a book about managing public money it first considers what is meant by the term public money and what it is spent on. Second, it looks at the concept of public financial management, the public's expectations about managing public money and the link with public value theory. The third part is concerned with the financial aspects of the new public management (NPM) paradigm that has been adopted in many developed and developing countries. The fourth and final part is an outline of key concepts in public sector accounting that will be helpful in the remainder of this book.

What is public money?

The answer to this question is not quite as straightforward as the one that first comes to mind: that public money is the money government collects as taxes and spends on the provision of public services. There are many nuances. Governments do not only get money from taxes. They get some of their income from fees and charges, from properties and investments, from grants, donations and legacies, from state lotteries, from taxes, and from borrowing. And public services are not only provided by government, whether national or local. There are services provided by charities, voluntary organizations, faith-based groups and philanthropists as well as the wide range of services provided by private sector organizations either under direct contract with a public body or in some way regulated by the government.

One of the features of the modern public sector that a public manager has to get to grips with is its ambiguity. They are managing messy problems. And no longer are the services wholly delivered by civil servants working in a classical hierarchical bureaucracy (Mintzberg, 1983). In the modern age a public manager might be directly employed by a central or regional or local government body but they might be employed by a charity or private sector body. Regardless of the nature of their employer they will likely be operating in a network (Benington, 2009) where they may directly manage the delivery of a service, commission it from a partnership or third party or co-produce it with the service user. The public manager may be responsible for a range of services and each one may be produced in a different way. This book is concerned with the financial management arrangements that are required to sustain the public manager's network rather than trying to put a boundary around it.

In a sense public money is the money that might be referred to in popular newspapers as ‘ours’. This is not legally the case but citizens see money that they have paid over to government in a different way to money they have paid to a for-profit organization. When a company declares large profits or losses only the shareholders see the money as theirs, not every customer who has provided the turnover in the first place. So, public money might mean all the money received and managed by a government but if that were the case how should we regard the money donated to charities and used to provide public services?

It is from this that we get to the essence of the difference between the private sector and the public sector. For the private sector the goal is to make money but for the public sector money is the means to the end. As Mark Moore put it:

[Non-profit organizations] have to be able to sustain themselves financially and to do that they may have to compete to some degree with other non-profit firms. But their ultimate goal is not to capture and seize value for themselves, but to give away their capabilities to achieve the largest impact on social conditions that they can.

(Moore, 2003)

In the report Holding to Account (2001), Lord Sharman of Redlynch proposed a definition of public money for the purpose of accountability that picks up all these separate actors and facets. He wrote, publi...