Chapter 15 Managing for Results Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 1 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 Ways in which program budgets link expenditures to objectives Advantages and disadvantages of program budgets Why it s important to develop and report measures of service effects and accomplishments Special problems governments and NFPs face in planning and budgeting capital expenditures Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 2 1
Role of Accountants They play multiple roles in entity s management. There are 4 phases to the process: 1. When social problems arise: area specialists o Collect and analyze budgetary and financial information o Compare potential costs and benefits o Accountants can make valuable contribution to this phase. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 3 Role of Accountants (cont d) 2. When policy-makers select among the options presented to them: -Accountants have less to contribute in this phase. 3. When programs are administered by appropriate agencies: -Accountants actively involve in establishing plans, operating budgets, controlling costs, preparing financial and other operating reports. 4. When programs are audited: o Assessed by audit teams where accountants play a vital role. o The teams also include statisticians, economists, and other specialists. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 4 2
Limitations of Traditional Budgets Budget: o is the most significant of financial documents o Determines amounts of resources to be received o Details the financial strategy of the organization Limitation: But budget doesn t provide information on the extent the expenditures will enable the organization to achieve its objectives. Operational objectives: o Is at the heart of budgeting o Signifies specific sought-after results o Should be both quantifiable and measurable NOTE: Please look at the proposed budget for Highland Hills Assistance League on pg. 664. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 5 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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 6 3
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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 7 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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 8 4
Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 9 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 10 5
Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 11 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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 12 6
Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 13 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 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 14 7
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. 673. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 15 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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 16 8
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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 17 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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 18 9
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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 19 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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 20 10
SEA Indicators Measures of service efforts Measures of service accomplishments Measures that relate service efforts to service accomplishments GASB concepts statements emphasize that these 3 types of data be supplemented with explanatory information that can help users to understand the measures. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 21 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, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 22 11
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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 23 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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 24 12
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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 25 Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 26 13
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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 27 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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 28 14
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. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 29 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 it is operating costs are usually overlooked. Granof, et al. 7th edition 2016 John Wiley & Sons, Inc. All rights reserved. Chapter 15 30 15